<PAGE>

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

                                   FORM 10-K

                 FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
           SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

<Table>
<C>        <S>
   [X]     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
           SECURITIES EXCHANGE ACT OF 1934

           FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003

                                  OR


   [ ]     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
           SECURITIES EXCHANGE ACT OF 1934

           FOR THE TRANSITION PERIOD FROM           TO
</Table>

                         COMMISSION FILE NUMBER 0-20421

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

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

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

      REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:  (720) 875-5400

          SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

<Table>
<Caption>
               TITLE OF EACH CLASS                       NAME OF EXCHANGE ON WHICH REGISTERED
               -------------------                       ------------------------------------
<S>                                                <C>
 Series A Common Stock, par value $.01 per share                New York Stock Exchange
 Series B Common Stock, par value $.01 per share                New York Stock Exchange
</Table>

       SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:  NONE

     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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  [ ]

     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 aggregate market value of the voting stock held by nonaffiliates of
Liberty Media Corporation computed by reference to the last sales price of such
stock, as of the closing of trading on February 27, 2004, was approximately
$33,160,000,000.

     The number of shares outstanding of Liberty Media Corporation's common
stock as of February 27, 2004 was:

               SERIES A COMMON STOCK -- 2,683,134,282 SHARES; AND
                  SERIES B COMMON STOCK -- 217,100,515 SHARES.

                      DOCUMENTS INCORPORATED BY REFERENCE

     The Registrant's definitive proxy statement for its 2004 Annual Meeting of
Shareholders is hereby incorporated by reference into Part III of this Annual
Report on Form 10-K.
<PAGE>

                           LIBERTY MEDIA CORPORATION

                        2003 ANNUAL REPORT ON FORM 10-K

                               TABLE OF CONTENTS

<Table>
<Caption>
                                                                               PAGE
                                                                               -----
<S>              <C>                                                           <C>
                                       PART I
Item 1.          Business....................................................    I-1
Item 2.          Properties..................................................   I-23
Item 3.          Legal Proceedings...........................................   I-24
Item 4.          Submission of Matters to a Vote of Security Holders.........   I-26

                                      PART II
Item 5.          Market for Registrant's Common Equity and Related
                 Stockholder Matters.........................................   II-1
Item 6.          Selected Financial Data.....................................   II-2
Item 7.          Management's Discussion and Analysis of Financial Condition
                 and Results of Operations...................................   II-3
Item 7A.         Quantitative and Qualitative Disclosures About Market
                 Risk........................................................  II-29
Item 8.          Financial Statements and Supplementary Data.................  II-32
Item 9.          Changes in and Disagreements with Accountants on Accounting
                 and Financial Disclosure....................................  II-32
Item 9A.         Controls and Procedures.....................................  II-32

                                      PART III
Item 10.         Directors and Executive Officers of the Registrant..........  III-1
Item 11.         Executive Compensation......................................  III-1
Item 12.         Security Ownership of Certain Beneficial Owners and
                 Management and Related Stockholder Matters..................  III-1
Item 13.         Certain Relationships and Related Transactions..............  III-1
Item 14.         Principal Accountant Fees and Services......................  III-1

                                      PART IV
Item 15.         Exhibits, Financial Statement Schedules and Reports on Form
                 8-K.........................................................   IV-1
</Table>
<PAGE>

                                    PART I.

ITEM 1.  BUSINESS.

     (a) General Development of Business

     Liberty Media Corporation is a holding company which, through its ownership
of interests in subsidiaries and other companies, is primarily engaged in (i)
electronic retailing, (ii) international cable television distribution,
telephony and programming, and (iii) the production, acquisition and
distribution through all available formats and media of branded entertainment,
educational and informational programming and software. In addition, companies
in which we own interests are engaged in, among other things, (i) interactive
commerce via the Internet, television and telephone, (ii) domestic cable and
satellite broadband distribution services, and (iii) wireless domestic telephony
and other technology ventures. Through our affiliated companies we operate in
the United States, Europe, South America and Asia. Our principal assets include
interests in QVC, Inc., Starz Encore Group LLC, Ascent Media Group, Inc.,
Discovery Communications, Inc., UnitedGlobalCom, Inc., Jupiter
Telecommunications Co., Ltd., Court Television Network, Game Show Network,
InterActiveCorp and The News Corporation Limited.

     From March 9, 1999 through August 9, 2001 we were a wholly-owned subsidiary
of AT&T Corp. On March 9, 1999, AT&T acquired by merger our parent company at
that time, the former Tele-Communications, Inc. ("TCI"), which was converted to
a limited liability company and renamed AT&T Broadband, LLC. As part of that
merger, AT&T issued its Class A and Class B Liberty Media Group tracking stock,
which was designed to reflect the economic performance of the businesses and
assets of AT&T attributed to its "Liberty Media Group." Our businesses and
assets constituted all of the businesses and assets of Liberty Media Group.

     Effective August 10, 2001, AT&T effected our split-off pursuant to which
our common stock was recapitalized, and each share of AT&T Class A Liberty Media
Group tracking stock was redeemed for one share of our Series A common stock,
and each share of AT&T Class B Liberty Media Group tracking stock was redeemed
for one share of our Series B common stock.

     Following the split off, we are no longer a subsidiary of AT&T and no
shares of AT&T Liberty Media Group tracking stock remain outstanding.

RECENT DEVELOPMENTS

     In March and April of 2003, we issued an aggregate principal amount of
$1,750 million of 0.75% Senior Exchangeable Debentures due 2023 for net cash
proceeds of $1,715 million after expenses. Each $1,000 debenture is exchangeable
at the holder's option for the value of 57.4079 shares of Time Warner Inc.
common stock. We may, at our election, pay the exchange value in cash, Time
Warner Inc. common stock, shares of our Series A common stock or a combination
thereof. In addition, in April 2003, we issued $1,000 million principal amount
of 5.70% Senior Notes due 2013 for net cash proceeds of $990 million.

     During 2003, pursuant to contractual pre-emptive rights, we acquired
approximately 48.7 million shares of InterActiveCorp for cash consideration of
approximately $1,166 million. We also increased our economic and voting interest
in News Corp. during 2003 and the first quarter of 2004. We now own 210.8
million non-voting News Corp. American Depository Shares and 48 million voting
ADSs representing approximately 17% of News Corp.'s equity and a 9% voting
interest.

     On September 17, 2003, we completed our acquisition of Comcast
Corporation's approximate 56.5% ownership interest in QVC, Inc for approximately
$7.9 billion comprised of cash, Floating Rate Senior Notes and shares of our
Series A common stock. QVC markets and sells a wide variety of consumer products
and accessories primarily by means of televised shopping programs on the QVC
network and via the Internet through QVC.com. Prior to this acquisition, we
owned approximately 41.7% of QVC. The QVC management team continues to own the
approximate 2% of QVC that we do not own.

                                       I-1
<PAGE>

     During the third and fourth quarters of 2003, we exchanged shares of our
Series A common stock for all of the publicly held shares of the outstanding
common stock of Ascent Media Group, Inc., Liberty Satellite & Technology, Inc.,
and On Command Corporation. The aggregate value, for accounting purposes, of the
Series A common stock that we issued in these acquisitions was approximately $42
million.

     In November 2003, we announced our intention to reduce our outstanding debt
balance by approximately $4.5 billion over the next two years. We initiated the
debt reduction plan during the fourth quarter of 2003 by using cash on hand and
proceeds from the sale of certain non-strategic public holdings, including all
of our shares of Vivendi Universal and Cendant Corporation, to (i) redeem $1.0
billion of floating rate notes that had been issued to Comcast, (ii) repay over
$930 million of outstanding bank debt of our wholly-owned subsidiaries and (iii)
retire approximately $578 million of other outstanding corporate indebtedness.
We expect that the $2.0 billion reduction planned for the next two years ($1.0
billion in 2004 and $1.0 billion in 2005) will be funded with a combination of
free cash flow from existing businesses, cash on hand, proceeds from equity
collar expirations and dispositions of non-strategic assets.

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

     On December 18, 2003, UGC completed its offer to exchange shares of its
Class A common stock for the outstanding shares of UGC Europe common stock that
it did not already own. Upon completion of the exchange offer, UGC owned 92.7%
of the outstanding shares of UGC Europe common stock. On December 19, 2003, UGC
effected a "short-form" merger with UGC Europe. In the short-form merger, each
share of UGC Europe common stock not tendered in the exchange offer was
converted into the right to receive the same consideration offered in UGC's
earlier exchange offer, and UGC acquired the remaining 7.3% of UGC Europe.

     On January 5, 2004, the holders of all of UGC's 8,198,016 outstanding
shares of Class B common stock transferred their Class B shares to us in
exchange for 12,576,968 shares of our Series A common stock and a cash payment
of approximately $13 million. We refer to this transaction as the "founders
transaction." The combination of the Class B shares acquired in the founders
transaction with the shares of UGC's Class A and Class C common stock already
owned by us, our recent exercise of preemptive rights to acquire additional
shares of UGC's Class A common stock and our participation in UGC's recent
rights offering results in our ownership of approximately 55% of UGC's
outstanding common stock, which represents approximately 92% of the outstanding
voting power of UGC. As a result of the founders transaction, the restrictions
set forth in certain stockholders agreements and standstill agreements to which
we were a party terminated, and we now have the power to elect all of the
members of UGC's board of directors and, generally, to control UGC. In
connection with the consummation of the founders transaction, we entered into a
new standstill agreement with UGC that provides that we may not acquire more
than 90% of UGC's outstanding common stock unless we make an offer or effect
another transaction to acquire all of the outstanding common stock of UGC not
already owned by us. Under certain circumstances, such an offer or transaction
would require an independent appraisal to establish the price to be paid to
stockholders unaffiliated with Liberty. In addition, we are entitled to
preemptive rights with respect to certain issuances of UGC common stock.

     Our Board of Directors has approved a resolution authorizing us to take the
necessary actions to effect the spin-off of assets principally comprised of our
International Group as a tax free distribution to our shareholders. The
completion of this transaction is subject to, among other things, a final
determination of the assets to be included in the spin-off, the receipt of a
favorable tax opinion and regulatory and other third party approvals. Upon
completion of this transaction, the International Group will be a separate
publicly traded company.

                                       I-2
<PAGE>

                                   * * * * *

     Certain statements in this Annual Report on Form 10-K constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. To the extent that statements in this Annual
Report are not recitations of historical fact, such statements constitute
forward-looking statements which, by definition, involve risks and
uncertainties. In particular, statements under Item 1. "Business," Item 2.
"Properties," Item 3. "Legal Proceedings," Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and Item 7A.
"Quantitative and Qualitative Disclosures About Market Risk" contain
forward-looking statements. 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 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 industry;

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

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

     - rapid technological changes;

     - capital spending for the acquisition and/or development of
       telecommunications networks and services;

     - uncertainties associated with product and service development and market
       acceptance, including the development and provision of programming, for
       new television and telecommunications technologies;

     - future financial performance, including availability, terms and
       deployment of capital;

     - the ability of suppliers and vendors to deliver products, equipment,
       software and services;

     - the outcome of any pending or threatened litigation;

     - availability of qualified personnel;

     - changes in, or failure or inability to comply with, government
       regulations, including, without limitation, regulations of the Federal
       Communications Commission, and adverse outcomes from regulatory
       proceedings;

     - changes in the nature of key strategic relationships with partners and
       joint venturers;

     - competitor responses to our products and services, and the products and
       services of the entities in which we have interests; and

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

These forward-looking statements and such risks, uncertainties and other factors
speak only as of the date of this Annual Report, and we expressly disclaim any
obligation or undertaking to disseminate any updates or revisions to any
forward-looking statement contained herein, to reflect any change in our
expectations with regard thereto, or any other change in events, conditions or
circumstances on which any such statement is based.

                                       I-3
<PAGE>

     This Annual Report includes information concerning OpenTV Corp.,
UnitedGlobalCom, Inc. and other public companies that file reports and other
information with the SEC in accordance with the Securities Exchange Act of 1934.
Information contained in this Annual Report concerning those companies has been
derived from the reports and other information filed by them with the SEC. If
you would like further information about these companies, the reports and other
information they file with the SEC can be accessed on the Internet website
maintained by the SEC at www.sec.gov. Those reports and other information are
not incorporated by reference in this Annual Report.

     (b) Financial Information About Operating Segments

     Through our ownership of interests in subsidiaries and other companies, we
are primarily engaged in the electronic retailing, media, communications and
entertainment industries. Each of these businesses is separately managed. We
have divided our businesses into four Groups based upon each businesses'
services or products: Interactive Group, International Group, Networks Group and
Corporate and Other. In analyzing our operating results, our management reviews
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.

     We identify our reportable segments as (A) those consolidated subsidiaries
that (1) represent 10% or more of our 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 our pre-tax earnings or (2) are significant
to an evaluation of the performance of a Group. Financial information related to
our operating segments can be found in note 18 to our consolidated financial
statements found in Part II of this report.

     (c) Narrative Description of Business

     Our subsidiaries, significant equity affiliates and other assets are
divided into four Groups: the Interactive Group, the Networks Group, the
International Group and Corporate and Other. The following table identifies the
more significant businesses included in each of these Groups.

     INTERACTIVE GROUP

     QVC, Inc.
     Ascent Media Group, Inc.
     On Command Corporation
     OpenTV Corp. (Nasdaq:OPTV)
     TruePosition, Inc.
     InterActiveCorp (Nasdaq:IACI)

     INTERNATIONAL GROUP

     UnitedGlobalCom, Inc. (Nasdaq: UCOMA)
     Jupiter Telecommunications Co., Ltd. (Japan)
     Jupiter Programming Co., Ltd. (Japan)
     Liberty Cablevision of Puerto Rico, Inc.
     Pramer S.C.A. (Argentina)

     NETWORKS GROUP

     Starz Encore Group LLC
     Discovery Communications, Inc.
     Courtroom Television Network, LLC
     Game Show Network, LLC
     The News Corporation Limited (NYSE:NWS; NYSE:NWSa)

     CORPORATE AND OTHER

     Time Warner Inc (NYSE:TWX)
     Sprint Corporation (NYSE:PCS)
     Viacom, Inc. (NYSE:VIAb)

                                       I-4
<PAGE>

                               INTERACTIVE GROUP

     Our Interactive Group includes companies that provide a wide array of
interactive services. Electronic retailing operators, like QVC, offer a wide
variety of goods for sale via televised shopping programs, including 24-hour
dedicated shopping channels, and over the Internet. Electronic retailing
operators generally derive their revenue by obtaining a high volume of goods at
wholesale prices and reselling them at a profit.

     Interactive technology services are offered by many digital television
network operators to subscribers with digital television set-top boxes and to
hotels, motels and resorts seeking to provide their guests with in-room video
entertainment and information services. In the future, interactive technology
services may be offered to users of mobile devices by means of existing location
based technology. Interactive service providers combine and market their
software, content and applications to these providers, who in turn provide their
users with such interactive television services as electronic commerce, targeted
advertising, "video on demand" and multiplayer gaming. Interactive service
providers derive their revenue from software licenses, affiliation agreements
and other contracts with the network operators and other providers that offer
their services.

     Creative media services are offered to the media and entertainment
industry. Providers of creative media services provide services necessary to
distribute programming content including services necessary to complete the
creation of original content and the management of existing content libraries.

QVC, INC.

     QVC, Inc. and its subsidiaries market and sell 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. QVC programming is divided into segments
that are televised live with a host who presents the merchandise, sometimes with
the assistance of a guest representing the product vendor, and conveys
information relating to the product to QVC's viewers. QVC's websites offer an
alternative outlet for sales by allowing consumers, who prefer to comparison
shop online, to purchase a wide assortment of goods that were previously offered
on the QVC networks as well as other items that are exclusive to the website.
For the year ended December 31, 2003, approximately 11% of QVC's revenue was
from sales merchandise ordered through its various websites.

     QVC offers a variety of merchandise at attractive prices. QVC purchases, or
obtains on consignment, products from domestic and foreign manufacturers and
wholesalers, often on favorable terms based upon the volume of the transactions.
QVC classifies its merchandise into three groups: home, apparel/accessories and
jewelry. In the year ended December 31, 2003, home, apparel/accessories and
jewelry accounted for approximately 48%, 22% and 30%, respectively, of QVC's net
revenue generated by its United States operations. QVC offers products in each
of these merchandise groups that are exclusive to QVC as well as popular brand
name products. QVC's exclusive products are often endorsed by celebrities,
designers and other well known personalities. QVC does not depend on any single
supplier or designer for a significant portion of its inventory.

     As described more fully below, QVC relies on satellite and cable television
operators to distribute its programming to its customers through long-term
affiliation agreements. QVC's affiliation agreements with these distributors
have a weighted average remaining term (based on subscribers) of approximately 5
years at December 31, 2003. QVC's ability to continue to sell products to its
customers is dependent on its ability to maintain and renew these affiliation
agreements in the future.

     In the U.S., QVC uplinks its programming from its uplink facility in
Pennsylvania to a protected transponder on a domestic satellite. "Protected"
status means that, in the event of transponder failure, QVC's signal will be
transferred to a spare transponder or, if none is available, to a preemptible
transponder located on the same satellite or, in certain cases, to a transponder
on another satellite owned by the same lessor if one is available at the time of
the failure. QVC's international operations each lease uplinking facilities from
third parties for their uplinking and transmit their programming to
non-preemptible transponders on five international satellites. "Non-preemptible"
status means that QVC's transponders cannot be preempted in favor of a user of a
"protected" failure. QVC's transponder lease agreement for the domestic
transponder

                                       I-5
<PAGE>

expires in 2004, and QVC has negotiated another lease through 2018 to replace
the one expiring in 2004. QVC's transponder lease agreements for the
international transponders expire in 2006 through 2013.

     QVC distributes its television programs, via satellite, to multichannel
video program distributors for retransmission to subscribers in the United
States, the United Kingdom, Germany, Japan and neighboring countries that
receive QVC's broadcast signals. In return for carrying the QVC signals, each
domestic programming distributor in the United States, the UK and Germany
receives an allocated portion, based upon market share, of up to 5% of the net
sales of merchandise sold via the television programs to customers located in
the programming distributor's service areas. In Japan, some programming
distributors receive an agreed upon monthly fee per subscriber regardless of the
net sales, while others earn a variable percentage of net sales. QVC's shopping
programs are telecast 24 hours a day, seven days a week to 85.9 million homes in
the United States. QVC Shopping Channel reaches 13.2 million households in the
United Kingdom and the Republic of Ireland and is broadcast live 17 hours a day.
QVC Deutschland GmbH, QVC's shopping network in Germany, reaches 27 million
households throughout Germany and Austria and is broadcast live 24 hours a day.
QVC Japan, QVC's joint venture with Mitsui & Co., LTD, reaches 11.8 million
households and is broadcast live 16 hours a day.

     QVC strives to maintain promptness and efficiency in order taking and
fulfillment. QVC has four domestic phone centers that can direct calls from one
call center to another as volume mandates, which reduces a caller's hold time,
helping to ensure that orders will not be lost as a result of hang-ups. QVC also
has one phone center in each of the UK and Japan and two call centers in
Germany. QVC also utilizes computerized voice response units, which handle
approximately 38% of all orders taken. QVC has seven distribution centers
worldwide and is able to ship 90% of its orders within 48 hours.

     We have an approximate 98% ownership interest in QVC. The QVC management
team owns the remaining interest.

ASCENT MEDIA GROUP, INC.

     Ascent Media Group, Inc. is a wholly-owned subsidiary, which through its
Creative Services group, Media Management Services group and Networks Services
group, provides creative media services to the media and entertainment
industries. Its clients include major motion picture studios, independent
producers, broadcast networks, cable channels, advertising agencies and other
companies that produce, own and/or distribute entertainment, news, sports,
corporate, educational, industrial and advertising content.

     Ascent Media's Creative Services group provides services necessary to
complete the creation of original content, including feature films, mini-series,
television shows, television commercials, music videos, promotional and identity
campaigns and corporate communications programming. The group manipulates or
enhances original visual images or audio captured in principal photography or
creates new three dimensional images, animation sequences or sound effects. The
Creative Services group has three divisions: Entertainment Television,
Commercial Television and Creative Sound Services which operate in the United
States and Europe, primarily in California, New York and London. The
Entertainment Television and Commercial Television divisions provide to
producers of episodic television series, movies-of-the-week, specials,
television commercials, music videos, theatrical film trailers, interstitial and
promotional material, and identity and corporate image campaigns, services which
include developing negatives, transferring film to digital media, creating
visual effects, and editing and assembling source material into final form. The
Creative Sound Services division provides music design, music supervision,
script breakdown and budgeting, music pre-recording, music composition and
clearance, score production and song placement.

     The Media Management Services group provides owners of content libraries
with an entire complement of facilities and services necessary to optimize,
archive, manage and repurpose media assets for global distribution via freight,
satellite, fiber and the Internet. This group's services include providing
access to all forms of content, duplication and formatting services, language
conversions and laybacks, restoration and preservation of old or damaged
content, mastering from motion picture film to high resolution or data formats,
digital audio and video encoding services and digital media management services
for global home video,

                                       I-6
<PAGE>

broadcast, pay-per-view, video-on-demand (VOD), streaming media and other
emerging new media distribution channels.

     The Networks Services group provides the facilities and services necessary
to assemble and distribute programming content for cable and broadcast networks
via fiber, satellite and the Internet to viewers in North America, Europe and
Asia. These services principally include production support and facilities for
the timely creation of original programming such as hosted and news segments and
live shows; language translation and subtitling; assembly, origination and
distribution; on-air promotion; fiber transport; uplink and satellite
transponder services; designing, building, installing and servicing advanced
video systems; and broadcast and industrial video equipment rentals. For this
group, Ascent Media has production studios in Connecticut and Singapore, and
satellite facilities in California, New York, New Jersey, Connecticut,
Minnesota, London and Singapore.

     Ascent Media's groups earn revenue through the provision of the
aforementioned services. Ascent Media's primary expenses are personnel,
materials and equipment costs. No single customer accounted for more than 10% of
Ascent Media's consolidated revenue in 2003.

     The demand for Ascent Media's core motion picture services has historically
been seasonal, with higher demand in the spring (second fiscal quarter) and fall
(fourth fiscal quarter), and lower in the winter and summer, corresponding to
Ascent Media's first and third fiscal quarters, respectively. Similarly, demand
for Ascent Media's television program services and commercial television
services (collectively, television services) is higher in the first, second and
fourth quarters and lower in the summer, or third quarter. However, recent
trends in the demand for television services may result in increased business
for Ascent Media in the summer. In addition, the timing of projects in Ascent
Media's Media Management Services Group and Network Services Group are beginning
to offset the quarters in which there has been historically lower demand for
Ascent Media's motion picture and television services. Accordingly, Ascent Media
expects to experience less dramatic quarterly fluctuations in its operating
performance in the future.

ON COMMAND CORPORATION

     On Command Corporation, a wholly-owned subsidiary, is a leading provider
(based on number of hotel rooms served) of in-room video entertainment and
information services to hotels, motels and resorts (which we collectively refer
to as hotels) in the United States. On Command's base of installed rooms was
approximately 859,000 rooms at December 31, 2003.

     On Command provides in-room video entertainment and information services on
two main technology platforms: the OCX video system and the OCV video system.
The OCX video system is a digital platform that provides enhanced multimedia
applications, including an improved graphical interface for movies and games,
digital music, television-based Internet with a wireless keyboard and other
guest services. The OCV video system is a video selection and distribution
technology platform that allows hotel guests to select, at any time, movies and
games through the television sets in their hotel rooms. In addition, both of On
Command's platforms provide for in-room viewing of select cable channels (such
as HBO, Starz, ESPN, CNN, Disney Channel and Discovery). At December 31, 2003,
On Command provided its OCX and OCV video systems in 349,000 and 497,000 rooms,
respectively.

     The hotels providing On Command's services collect fees from their guests
for the use of On Command's services and are provided a commission equal to a
negotiated percentage of the net revenue earned by On Command for such usage.
The amount of revenue realized by On Command is affected by a variety of
factors, including among others, hotel occupancy rates, the "buy rate" or
percentage of occupied rooms that buy movies or services, the quality of On
Command's pay-per-view movie offerings, business and leisure travel patterns and
changes in the number of rooms served. With the exception of December, which is
generally On Command's lowest month for revenue, On Command typically does not
experience significant variations in its monthly revenue that can be attributed
solely to seasonal factors.

     On Command primarily provides its services under long-term contracts to
hotel corporations, hotel management companies, and individually owned and
franchised hotel properties. On Command's services are

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offered predominantly in the large deluxe, luxury, and upscale hotel categories
serving business travelers, such as Marriott, Hilton, Six Continents, Hyatt,
Wyndham, Starwood, Radisson, Fairmont, Four Seasons and other select hotels. On
Command's contracts with hotels generally provide that On Command will be the
exclusive provider of in-room, pay-per-view video entertainment services to the
hotel and generally permit On Command to set its prices. On Command's contracts
with hotels typically set forth the terms governing On Command's provision of
free-to-guest programming as well. At December 31, 2003, contracts covering
approximately 38% of On Command's installed rooms have expired, or are scheduled
to expire, if not otherwise renewed, during the two-year period ending December
31, 2005. Marriott, Hilton and Six Continents accounted for approximately 33%,
13% and 11% respectively, of On Command's room revenues for the year ended
December 31, 2003. These revenue percentages represent all chain affiliations
including owned, managed and franchised hotels.

     On Command's master contract with Hilton Hotels Corporation expired on
April 27, 2000. In October 2000, Hilton announced that it would not be renewing
its master contract with On Command. On Command currently provides service to
approximately 110,100 rooms in 475 hotels that are owned, managed or franchised
by Hilton. Hotel contracts are written at the individual hotel level and
expirations will occur over an extended period of time depending on the
installation date of the individual hotel. On Command expects that hotels owned
by Hilton will not renew their contracts as they expire. Hotels that are managed
or franchised by Hilton are not precluded from renewing their contracts with On
Command, but On Command cannot predict the number of managed and franchised
Hilton hotels that will renew.

OPENTV CORP.

     OpenTV provides technology, content and applications, and services that
enable digital television network operators to deliver and manage interactive
television services on all major digital television platforms -- cable,
satellite and terrestrial -- in all major geographic areas of the world.
OpenTV's software products, including its core middleware and its Wink
interactive service platform, have been shipped in more than 40 million digital
set-top boxes worldwide. OpenTV offers its customers a comprehensive suite of
interactive and enhanced television solutions that leverage its proprietary
software and technologies and worldwide patent portfolio. OpenTV's core software
products enable network operators to manage the creation and delivery of
interactive and enhanced television services to their subscribers. OpenTV
develops and manages branded television channels that allow viewers to play
interactive games, and they offer applications that enable viewers to engage in
commerce transactions, retrieve information such as weather reports and sports
updates, and engage in other interactive services, including fixed-odds gaming,
through their televisions. OpenTV also recently began efforts to market and
commercially deploy targeted and addressable advertising solutions and research
analyses detailing how viewers engage and interact with programs and
advertisements. To complement its technologies and interactive content and
applications, OpenTV also offers a full suite of professional engineering and
consulting services. These services allow OpenTV to manage various interactive
television projects, from discrete integration or development assignments to
complete end-to-end digital programming solutions for network operators.

     OpenTV derives revenue from (1) royalties from the sale of set-top boxes
that incorporate OpenTV software; (2) fees for consulting engagements for
set-top box manufacturers, network operators and system integrators and
maintenance and support for set-top box manufacturers; (3) channel fees from
consumers of the PlayJam interactive games channel who pay to play games and
register for prizes; and (4) license fees from the sale of products such as
Device Mosaic, OpenTV Streamer, OpenTV Software Developers Kit and various
applications, including OpenTV Publisher. Echostar, the Digital Interactive
Television Group, BSkyB and Motorola accounted for 12%, 12%, 11% and 10%,
respectively, of OpenTV's revenue in 2003.

     While OpenTV is one of the world's leading interactive television
companies, the interactive television industry is still in its infancy. The
growth of the industry and of OpenTV is highly dependent upon a number of
factors, including (i) consumer acceptance of interactive services and products;
(ii) deployment of capital by broadband service providers for interactive
hardware and software; (iii) acceptance by broadband service providers of
OpenTV's interactive technology and products; and (iv) continued development of
interactive

                                       I-8
<PAGE>

technology, products and services. These factors are not within OpenTV's control
and no assurance can be given that interactive television will expand beyond its
current state.

     We own shares of OpenTV's Class A common stock and Class B common stock,
representing a 33% equity interest and an 80% voting interest in OpenTV. Each
share of OpenTV Class B common stock has 10 votes per share and is convertible
into one share of OpenTV Class A common stock, which has one vote per share.

TRUEPOSITION, INC.

     TruePosition, Inc. develops and markets technology for locating wireless
phones and other wireless devices, enabling wireless carriers, application
providers and other enterprises to provide E-911 and other location-based
services to mobile users worldwide. "E-911" or "Enhanced 911" refers to an FCC
mandate requiring wireless carriers to implement wireless location capability.
Cingular Wireless began deploying TruePosition's technology in late 2002 and
throughout 2003, and T-Mobile USA began deploying such technology in 2003.
Although many of these services have not yet been developed, TruePosition's
wireless location technology can also be used to implement a number of
commercial location based services including (1) convenience/information
services such as "concierge" and "personal navigation" which identify and
provide directions to the nearest restaurant, ATM, or gas station or allow
travelers to obtain other information specific to their location; (2) corporate
applications such as fleet or asset tracking which could enable enterprises to
better manage mobile assets to optimize service or cut costs; (3)
entertainment/community services such as "friend finder" or "m-dating" which
could allow mobile users to create a localized community of people with similar
interests and receive notification when another group member is close-by; (4)
mobile commerce services which could help users shop or purchase goods or
services from the retailer closest to their current location; and (5) safety
related applications which could help public or private safety organizations
find or track mobile users in need of assistance or help locate stolen property.

     The TruePosition(R) Finder(TM) system is a passive overlay system designed
to enable mobile wireless service providers to determine the location of
wireless devices, including cellular and PCS telephones. Using patented time
difference of arrival (TDOA) and angle of arrival (AOA) technology, the
TruePosition Finder(TM) system calculates the latitude and longitude of a
designated wireless telephone or transmitter and forwards this information in
real time to application software. TruePosition technology offerings cover all
of the major wireless air interfaces such as Time Division Multiple Access
(TDMA), Code Division Multiple Access (CDMA), Analog Mobile Phone Service (AMPS)
and Global System Mobile (GSM).

     We own approximately 89% of the common equity of TruePosition and 100% of
the TruePosition preferred stock with a liquidation preference of $305 million
at December 31, 2003.

INTERACTIVECORP

     InterActiveCorp, in which we have an approximate 20% ownership interest, is
a multi-brand interactive commerce company transacting business worldwide via
the Internet, television and the telephone. InterActiveCorp's portfolio of
companies collectively enables direct-to-consumer transactions across many
areas, including home shopping, ticketing, personals, travel, teleservices and
local services. InterActiveCorp operates its business in three groups: Travel
Services, Electronic Retailing and Information and Services.

     InterActiveCorp's Travel Services Group includes Expedia, an online travel
agency; Hotels.com, which provides discount hotel accommodations worldwide
through its own Websites, its toll-free call centers and through third-party
marketing and distribution agreements; Interval International, a
membership-services company providing timeshare exchange and other value-added
programs to its timeshare-owning members and resort developers; and TV Travel
Shop, a company based in the United Kingdom that owns and operates two
television channels in the United Kingdom that sell vacation packages to
viewers.

     InterActiveCorp's primary businesses in its Electronic Retailing Group are
Home Shopping Network-U.S. and International TV Shopping. Both of HSN and
International TV Shopping sell various consumer goods by means of live,
electronic retail sales programs 24 hours a day, seven days a week. In addition,
HSN

                                       I-9
<PAGE>

sells merchandise via the Internet through HSN.com. International TV Shopping
also operates a game-show-oriented television channel and a travel-oriented
shopping television channel. As of September 30, 2003, HSN was available in
approximately 79.7 million households. As of September 30, 2003, Home Shopping
Europe reached 27.4 million households in Germany, 1.8 million households in
Austria, and 1.4 million households in Switzerland. HSN classifies its
merchandise into five categories: home hard goods, home fashions, jewelry,
health/beauty and apparel/accessories, each of which accounted for 26%, 16%,
23%, 26% and 9%, respectively, of HSN's total revenue in the third quarter of
2003.

     InterActiveCorp's Information and Services Group includes Ticketing
(Ticketmaster, ticketmaster.com and ReserveAmerica), Personals (Match.com),
Local Services (Citysearch, Entertainment Publications and Evite), Precision
Response Corporation and USA Electronic Commerce Solutions LLC and Styleclick.

                              INTERNATIONAL GROUP

     Our International Group includes businesses operating internationally that
offer two different types of products and services: broadband distribution and
video programming.

     Cable television systems deliver multiple channels of television
programming to subscribers who typically pay a monthly fee for the service.
Video, audio and data signals are received at the cable system head-end over the
air or via satellite delivery by antennas, microwave relay stations and
satellite earth stations and are modulated, amplified and distributed over a
network of coaxial and fiber optic cable to the subscribers' television sets.
Cable television providers in most markets are currently upgrading their cable
systems to deliver new technologies, products and services to their customers.
These upgraded systems may allow cable operators to expand channel offerings,
add new digital video services, offer high-speed data services and, where
permitted, provide telephony services. The implementation of digital technology
significantly enhances the quantity and quality of channel offerings, and may
allow the cable operator to offer video-on-demand, additional pay-per-view
offerings, premium services and incremental niche programming. Upgraded systems
also enable cable networks to transmit data and gain access to the Internet at
significantly faster speeds, up to 100 times faster, than data can be
transmitted over conventional dial-up connections. Lastly, many cable providers
have been developing the capability to provide telephony services to residential
and commercial users at rates well below those offered by incumbent telephone
providers. Each of these businesses represents an opportunity for cable
providers to increase their revenue and operating cash flow by providing
services in addition to the traditional pay television services that have
historically been offered.

     Programming networks distribute their services through a number of
distribution technologies, including cable television, direct-to-home satellite,
broadcast television and the Internet. For more information on programming
networks, please see the description provided under "-- Networks Group" below.

UNITEDGLOBALCOM, INC.

     UGC is one of the largest broadband communications providers outside the
United States based upon the number of customers served. UGC provides video
distribution services in over 15 countries worldwide and telephone and Internet
access services in a growing number of international markets. UGC's operations
are grouped into two major geographic regions: Europe and Latin America.

  EUROPEAN OPERATIONS

     UGC's European operations are conducted through its 100% owned subsidiary,
UGC Europe, which provides services to 11 countries in Europe. UGC Europe's
operations are organized into two principal divisions: UPC Broadband and Chello
Media.

     UPC Broadband delivers video services, and in many of its Western European
systems and some of its Central and Eastern European systems, residential
telephone and Internet access services. UPC Broadband is in the process of
upgrading and integrating its information technology systems, creating a
pan-European infrastructure to support the delivery of its services.
Approximately 58% of UPC Broadband's homes passed are served by a network that
is capable of handling two-way communications. As of December 31, 2003, UPC

                                       I-10
<PAGE>

Broadband's network passed 10.4 million homes. As of December 31, 2003, UPC
Broadband had 6.6 million subscribers to its analog cable service and 139,000
subscribers to its digital cable service, as well as 192,000 consolidated
subscribers to its DTH services in Hungary, the Czech Republic and the Slovak
Republic.

     UPC Broadband relies on programming suppliers for substantially all of its
content. UPC Broadband's specific program offerings vary from country to
country. It offers expanded basic tier services with pay-per view services, and
in most areas its subscribers can purchase additional premium channels and/or
various tiers of programming services.

     UPC Broadband currently offers telephony services in six countries. This
technology generally does not require the installation of twisted copper pair
wiring, but does require installation of equipment at the master telecom center,
the distribution hub and in the customer's home to transform voice communication
into signals capable of transmission over the fiber and coaxial cable network.
In addition, each UPC Broadband operating company that offers telephone services
has entered into an interconnection agreement with the incumbent national
telecommunications service provider. As of December 31, 2003, UPC has 462,000
subscribers to its telephony service.

     UPC Broadband also offers subscribers high speed access to the Internet
over the upgraded portions of its network. As of December 31, 2003, UPC
Broadband provided Internet service to 791,000 subscribers in ten countries.

     Chello Media includes the UPC Broadband chello division, an investment
division, and Priority Telecom, N.V. The UPC Broadband chello division provides
broadband Internet and interactive digital products and services, transactional
service, digital broadcast and post-production services and thematic channels
for distribution on UGC Europe's network, third party networks and
direct-to-home platforms. The investment division manages UGC Europe's
non-consolidated investment assets. Priority Telecom, N.V., a majority-owned
subsidiary of UGC Europe, operates a competitive local exchange carrier business
and provides telephone and data network solutions to the business market,
concentrating on UGC Europe's core metropolitan markets in the Netherlands,
Austria and Norway. Priority Telecom is targeted mainly towards medium and large
business customers and metropolitan/national telecommunications providers. As of
December 31, 2003, Priority Telecom provided voice services, high-speed Internet
access, private data networks and customized network services to over 7,700
business customers.

  LATIN AMERICAN OPERATIONS

     UGC's primary Latin American operation is VTR GlobalCom S.A., a
wholly-owned provider of multi-channel television, high-speed Internet and
telephony services in Chile. VTR is the largest provider (based on homes passed
and number of customers) of multichannel video services in Chile, and the second
largest provider of residential telephone services (in terms of lines in
service). Wireline cable television is VTR's primary business. As of December
31, 2003, VTR had an estimated 69% market share of cable television services
throughout Chile. VTR has interconnect agreements with local carriers, cellular
operators and long distance carriers for its telephone service. In portions of
its network, VTR also offers high speed Internet access, with 129,000 customers
as of December 31, 2003. VTR's channel lineup consists of 53 to 69 channels
segregated into two tiers of service: a basic tier with 53 to 58 channels and a
premium service with 11 channels. For the programming services necessary to
complete its channel lineup, VTR relies mainly on international sources,
including suppliers from the United States, Europe, Argentina and Mexico.
Domestic cable television programming in Chile is only just beginning to develop
around local events such as soccer matches.

     VTR offers cable telephone service primarily to residential customers
requiring one or two telephone lines and to small businesses and home offices.
VTR offers basic dial tone service as well as several value-added services,
including voice mail, caller ID, speed dial, wake-up services and call waiting.
Approximately 58% of the homes passed by VTR's cable television systems are
capable of using VTR's telephone service.

                                       I-11
<PAGE>

     VTR offers high-speed Internet access through a two-way network passing
approximately 59% of homes passed. VTR offers several alternatives of
always -- on, unlimited use services including a high-speed service (up to 600
Kbps), a moderate service (up to 300 Kbps) and a light service (64 Kbps).

     We currently own an approximate 55% common equity interest, representing an
approximate 92% voting interest, in UGC. As described in more detail under
"General Development of Business-Recent Developments" above, in January 2004, we
acquired all of the high-vote shares of common stock owned by the founding
stockholders of UGC in exchange for shares of our stock and cash.

JUPITER TELECOMMUNICATIONS CO., LTD.

     J-COM is a broadband provider of integrated entertainment, information and
communication services in Japan and is currently the largest provider of cable
television services in Japan based upon the number of customers served.

     J-COM operates its broadband networks through 18 individually managed cable
franchises, and is the largest stockholder in each of these managed franchises.
Each managed franchise consists of headend facilities receiving television
programming from satellites, traditional terrestrial television broadcasters and
other sources, and a distribution network composed of a combination of
fiber-optic and coaxial cable, which transmits signals between the headend
facility and the customer locations. Nearly 100% of J-COM's network operates at
750MHz capacity. J-COM provides traditional analog cable services in all of its
managed franchises and provides digital and interactive television services in
some of its franchises. As of December 31, 2003, J-COM's network passed
approximately 6.0 million homes and served approximately 1.5 million basic cable
subscribers.

     J-COM currently offers telephony services over its own network in 16 of its
18 franchise areas. In the franchise areas where telephony services are
available, J-COM's headend facilities contain equipment that routes calls from
the local network to J-COM's telephony switches, which in turn transmit voice
signals and other information over the network. As of December 31, 2003, J-COM
had 555,000 telephony subscribers. J-COM currently provides only a single line
to the majority of its telephony customers, most of whom are residential
customers.

     J-COM currently owns an 87.4% interest in @Home Japan Co., Limited, a joint
venture with Sumitomo Corporation. J-COM also owns a 25.8% interest in Kansai
Multimedia Services, a provider of high-speed Internet access for cable system
operators in the Kansai region of Japan. In association with these joint
ventures, J-COM offers high-speed Internet access in all of its managed
franchises. As of December 31, 2003, J-COM had 633,000 subscribers to its high
speed Internet access service.

     In addition to its 18 managed franchises, J-COM owns non-controlling equity
interests, between 11% and 20%, in four cable franchises that are operated and
managed by third-party franchise operators. As of December 31, 2003, these
non-managed investments passed approximately 1.4 million homes and served
284,000 cable television and 117,000 high-speed Internet customers.

     J-COM sources its programming through multiple suppliers including its
affiliate, Jupiter Programming Co., Ltd. J-COM's relationship with JPC enables
J-COM to provide cost effective programming to its customers. We own 50% of JPC.
See "Jupiter Programming Co., Ltd." below for more information on JPC.

     At December 31, 2003, we, Sumitomo and Microsoft Corporation held
approximate ownership interests in J-COM of 45.2%, 31.8% and 19.4%,
respectively.

     We are party to certain stockholder arrangements relating to our interest
in J-COM. We and Sumitomo have agreed not to transfer our shares to a third
party before the earlier of February 12, 2008 or an initial public offering of
J-COM stock and have each granted to the other a right of first offer after
February 12, 2008. In addition, we, Sumitomo and Microsoft have each granted to
the other a right of first refusal with respect to any transfer of our
respective interests in J-COM to a third party. Microsoft has tag-along rights
with respect to certain sales of J-COM stock by us, and we have drag-along
rights as to Microsoft with respect

                                       I-12
<PAGE>

to certain sales of our J-COM stock. We are also entitled to certain preemptive
rights with respect to any new issuance of J-COM securities.

     We have the right to appoint three of J-COM's 13 directors and to nominate
persons to (and remove persons from) the positions of chief operating officer
and chief financial officer, which officers also serve as directors. Sumitomo
holds similar rights with respect to the chief executive officer and another
executive position of J-COM as well as the right to appoint three non-executive
directors. We and Sumitomo have also agreed that certain specified actions by
J-COM will require our mutual consent, while Microsoft has the right to
challenge certain types of transactions and require review by an independent
advisor based on specified criteria. We and Sumitomo have agreed not to acquire
or invest, to the extent of more than a 10% equity interest, in any broadband
businesses serving residential customers in Japan without first offering the
opportunity to J-COM.

     The foregoing arrangements expire upon an initial public offering of J-COM
stock, except that, if an initial public offering has not occurred by February
12, 2008, the arrangements relating to Microsoft will expire on that date.

JUPITER PROGRAMMING CO., LTD.

     JPC is a joint venture between us and Sumitomo Corporation that was formed
to develop, manage and distribute to cable television and DTH providers cable
and satellite television channels in Japan. As of December 31, 2003, JPC owned
four channels through wholly- or majority-owned subsidiaries and had investments
ranging from approximately 10% to 50% in eleven additional channels. JPC's
majority owned channels are a movie channel (Movie Plus), a golf channel (Golf
Network), a shopping channel (Shop Channel, in which JPC has a 60% interest and
Home Shopping Network has a 30% interest), and a women's channel (LaLa TV).
Channels in which JPC holds investments include three sports channels owned by J
Sports Broadcasting, a joint venture with News Television B.V., Sony Broadcast
Media Co. Ltd, Fuji Television Network, Inc. and SOFTBANK Broadmedia
Corporation; Animal Planet Japan, a one-third owned joint venture with Discovery
and BBC Worldwide; Discovery Channel Japan, a 50% owned joint venture with
Discovery; and AXN Japan, a 35% joint venture with Sony. JPC provides affiliate
sales services and in some cases advertising sales and other services to
channels in which it has an investment for a fee.

     The market for multi-channel television services in Japan is highly complex
with multiple cable systems and direct-to-home satellite platforms. Cable
systems in Japan served approximately 15.4 million homes at December 31, 2003. A
large percentage of these homes, however, are served by systems (referred to as
compensation systems) whose service principally consists of retransmitting free
TV services to homes whose reception of such broadcast signals has been blocked.
Higher capacity systems and larger cable systems that offer a full complement of
cable and broadcast channels, of which J-COM is the largest in terms of
subscribers, currently serve approximately 4.9 million households. All of the
channels in which JPC holds an interest are marketed as basic television
services to cable system operators, with distribution at December 31, 2003
ranging from approximately 13.0 million homes for Shop Channel (which is carried
in many compensation systems and on VHF as well as in multi-channel cable
systems) to approximately 1.6 million homes for more recently launched channels,
such as Animal Planet Japan.

     Each of the channels in which JPC has an interest is also currently offered
on Sky PerfecTV1, a digital satellite platform that delivers approximately 140
channels a-la-carte and in an array of basic and premium packages, from two
satellites operated by JSAT Corporation. JPC also offers channels on Sky
PerfecTV2, another satellite platform in Japan, which delivers a significantly
smaller number of channels. Under Japan's complex regulatory scheme for
satellite broadcasting, each television channel obtains a broadcast license
which is perpetual, although subject to revocation by the relevant governmental
agency, and leases from a satellite operator the bandwidth capacity on
satellites necessary to transmit the licensed channel to cable and other
distributors and direct-to-home satellite subscribers. In the case of
distribution of JPC's 33% or greater owned channels to Sky PerfecTV1, these
licenses and satellite capacity leases are held through its subsidiary, Jupiter
Satellite Broadcasting Corporation. The satellite broadcast licenses for JPC's
33% or greater owned channels with respect to Sky PerfecTV2 are held by two
other companies that are majority owned by

                                       I-13
<PAGE>

unaffiliated entities. JSBC's leases with JSAT for bandwidth capacity on JSAT's
two satellites expire in 2006 and 2010. JSBC and other licensed broadcasters
then contract with the platform operator, such as Sky PerfecTV, for customer
management and marketing services (sales and marketing, billing and collection)
and for encoding services (compression, encoding and multiplexing of signals for
transmission) on behalf of the licensed channels. All of the channels in which
JPC holds an interest are marketed as basic television services to DTH platform
subscribers with distribution at December 31, 2003 ranging from 3.1 million
homes for Shop Channel (which is carried as a free service to all DTH platform
subscribers) to approximately 0.2 million homes for more recently launched
channels, such as Animal Planet Japan.

     Approximately 81% of JPC's consolidated revenues for 2003 were attributable
to retail revenues generated by the Shop Channel. Cable operators are paid
distribution fees to carry the Shop Channel, which are either a fixed rate per
subscriber or the greater of a fixed rate per subscriber and a percentage of
revenue generated through sales in the cable operator's territory. After Shop
Channel, J Sports Broadcasting generates the most revenues of the channels in
which JPC has an interest, the majority of which revenues are derived from cable
and satellite subscriptions. Currently, advertising sales are not a significant
component of JPC's revenues.

     We and Sumitomo each own a 50% interest in JPC. Pursuant to a stockholders
agreement we entered into with JPC and Sumitomo, we and Sumitomo each have
preemptive rights to maintain our respective equity interests in JPC, and we and
Sumitomo each have the right to elect and remove one director for each 16.6%
equity interest in JPC that we or Sumitomo, as applicable, hold. No board action
may be taken with respect to certain material matters without the unanimous
approval of the directors appointed by us and Sumitomo, provided that we and
Sumitomo each own 30% of JPC's equity at the time of any such action. We and
Sumitomo each hold a right of first refusal with respect to the other's
interests in JPC, and we and Sumitomo have each agreed to provide JPC with a
right of first opportunity with respect to the acquisition of more than a 10%
equity position in, or the management of or any similar participation in, any
programming business or service in Japan and any other country to which JPC
distributes its signals, in each case subject to specified limitations.

LIBERTY CABLEVISION OF PUERTO RICO, INC.

     Liberty Cablevision of Puerto Rico, Inc., a wholly-owned subsidiary, is one
of Puerto Rico's largest cable television operators based on number of
customers. Liberty Cablevision of Puerto Rico operates three head ends, serving
approximately 123,500 basic subscribers in the communities of Luquillo, Arecibo,
Florida, Caguas, Humacao, Cayey and Barranquitas and 30 other municipalities.

     At December 31, 2003, 100% of Liberty Cablevision of Puerto Rico's network
had been rebuilt utilizing a minimum of 550 MHz bandwidth capacity. At December
31, 2003, Liberty Cablevision of Puerto Rico provided subscribers with 61 analog
channels. In some service areas, Liberty Cablevision of Puerto Rico also offers
48 digital channels, 46 premium channels, 46 pay-per-view channels and 33
digital music channels.

     A significant portion of Liberty Cablevision of Puerto Rico's cable network
consists of fiber-optic and coaxial cable. This infrastructure allows Liberty
Cablevision of Puerto Rico to offer enhanced entertainment, information and
telecommunications services including cable telephony services, high speed data
transmission services and Internet access using high speed cable modems to its
subscribers.

PRAMER S.C.A.

     Pramer S.C.A., a wholly-owned subsidiary, is an Argentine programming
company which supplies programming services to cable television and DTH
satellite distributors throughout Latin America. Pramer currently owns 11
channels and represents 12 additional channels, including two of Argentina's
four terrestrial broadcast stations. Total subscription units for 2003 (which
equals the sum of the total number of subscribers to each of Pramer's owned and
represented channels) were approximately 79 million, with the number of
subscribers per channel ranging from less than 25,000 for the smallest premium
service to over 9.7 million for the most popular basic service. Pramer's owned
channels include Canal (a), the first Latin-American quality arts channel, Film
& Arts, offering quality films, concerts, operas and interviews with artists,
and

                                       I-14
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elgourmet.com, a channel for the lovers of "the good things in life," all of
which are offered as basic television services. Approximately 50% of Pramer's
total revenue for 2003 was generated by owned channels. Pramer's represented
channels include Hallmark, Locomotion and Cosmo Channel (in which we own a 50%
interest).

                                 NETWORKS GROUP

     Programming networks distribute their services through a number of
distribution technologies, including cable television, direct-to-home satellite,
broadcast television and the Internet. Programming services may be delivered to
subscribers as part of a video distributor's basic package of programming
services for a fixed monthly fee, or may be delivered as a "premium" programming
service for an additional monthly charge. Whether a programming service is on a
basic or premium tier, the programmer generally enters into separate multi-year
affiliation with those distributors that agree to carry the service. Basic
programming services derive their revenues principally from the sale of
advertising time on their networks and from per subscriber license fees received
from distributors. Premium services do not sell advertising and primarily
generate their revenues from subscriber fees. A basic programming service may
derive a significant portion of its revenue from the sale of advertising and may
receive only limited amounts of revenue from subscriber license fees. It should
be noted, however, that the sale of advertising by these services is only made
possible through the affiliation with distributors. Thus the continued ability
to generate both advertising revenue and subscriber license fees is dependent on
these services' ability to maintain and renew their affiliation agreements.

STARZ ENCORE GROUP LLC

     Starz Encore Group LLC, a wholly-owned subsidiary, provides premium movie
networks distributed by cable, direct-to-home satellite, or DTH, and other
distribution media in the United States. It currently owns and operates 14
full-time domestic movie channels, consisting of STARZ!, primarily a first-run
movie service; Encore, which airs first-run movies and classic contemporary
movies; a number of thematic multiplex channels, a group of channels, each of
which exhibits movies based upon individual themes; and MOVIEplex, a "theme by
day" channel featuring a different Encore or thematic multiplex channel each
day, on a weekly rotation. Starz Encore recently launched a Starz On Demand
service, as well as high definition feeds of certain of its channels. At
December 31, 2003, Starz Encore had 151.0 million subscription units of which
approximately 74% were subscription units for the thematic multiplex channels
and the remainder were comprised of subscription units for STARZ!, Encore and
MOVIEplex. Subscription units represent the number of Starz Encore services
which are purchased by cable, DTH and other distribution media customers.

     The majority of Starz Encore's revenue is derived from the delivery of
movies to subscribers under long-term affiliation agreements with cable systems
and direct broadcast satellite systems, including Comcast Cable, DirecTV,
Echostar, Time Warner, Charter Communications, Cox Communications, Adelphia
Communications, Cablevision Systems, Insight Communications, Mediacom
Communications, the National Cable Television Cooperative and Superstar/Netlink
Group. The majority of Starz Encore's affiliation agreements, including its
agreements with Comcast Cable, DirecTV and Echostar, provide for payments based
on the number of subscribers that receive Starz Encore's services and expire
between September 2004 and December 2010. Starz Encore's affiliation agreements
with Comcast, DirectTV and Echostar are scheduled to expire at varying dates
through 2010. For the year ended December 31, 2003, Starz Encore earned 24%, 23%
and 11% of its total revenue from Comcast, DirecTV and Echostar, respectively.

     The costs of acquiring rights to programming are Starz Encore's principal
expenses. In order to exhibit theatrical motion pictures, Starz Encore enters
into agreements to acquire rights from major and independent motion picture
producers. Starz Encore currently has access to approximately 5,000 movies
through long-term licensing agreements. Eighty four percent of the first-run
output titles available to Starz Encore for airing are available pursuant to
exclusive licenses from Hollywood Pictures, Touchstone Pictures, Miramax Films,
Disney, Revolution Studios, Universal Studios, New Line Cinema and Fine Line
Cinema. Starz Encore also has exclusive rights to air first-run output from four
independent studios and has licensed the exclusive rights to first-run output
from Sony's Columbia Pictures, Screen Gems and Sony Pictures Classics for pay
television availabilities beginning on January 1, 2006. These output agreements
expire between 2004 and 2011, with

                                       I-15
<PAGE>

extensions, at the option of the respective studio, potentially extending the
expiration date in certain of these agreements to 2015.

     Starz Encore uplinks its programming to eight transponders on three
domestic communications satellites. Starz Encore leases its transponders under
long-term lease agreements. At December 31, 2003, Starz Encore's transponder
leases had termination dates ranging from 2019 to 2021. Starz Encore transmits
to these transponders from its uplink center in Englewood, Colorado.

DISCOVERY COMMUNICATIONS, INC.

     Discovery Communications, Inc. is a global media and entertainment company.
Discovery has grown from its core property, Discovery Channel, to current global
operations in over 150 countries across six continents, with over one billion
total subscriptions, including over 80 million subscriptions to channels
distributed by ventures in which Discovery has less than a majority ownership.
Discovery's programming is tailored to the specific needs of viewers around the
globe, and distributed through 84 separate feeds in 34 languages. Discovery
produces original programming and acquires content from numerous vendors
worldwide. Discovery's 33 networks of distinctive programming represent 17
entertainment brands including TLC, Animal Planet, Travel Channel, Discovery
Health Channel, Discovery Kids, and a family of digital channels. Discovery's
networks are carried by the largest cable television and satellite distributors
in the United States and abroad. Discovery also distributes BBC America in the
United States.

     Discovery earns revenue from the sale of advertising on its network, from
affiliation agreements with cable television and direct-to-home satellite
operators and by licensing its programs for international distribution.
Discovery's affiliation agreements typically have terms of 3 to 10 years and
provide for payments based on the number of subscribers that receive Discovery's
services. No single distributor represented more than 10% of Discovery's
consolidated revenue for the year ended December 31, 2003.

     Discovery's other properties consist of Discovery.com and approximately 120
retail outlets that offer life style, health, science and education oriented
products, as well as products related to other programming offered by Discovery.

     We hold a 50% interest in Discovery. Cox Communications, Inc. and
Advance/Newhouse Communications each hold a 25% interest in Discovery.

     Discovery is managed by its stockholders rather than a board of directors.
Generally, all actions to be taken by Discovery require the approval of the
holders of a majority of Discovery's shares, subject to certain exceptions,
including certain fundamental actions, which require the approval of the holders
of at least 80% of Discovery's shares. The stockholders of Discovery have agreed
that they will not be required to make additional capital contributions to
Discovery unless they all consent. They have also agreed not to own another
basic programming service carried by domestic cable systems that consists
primarily of documentary, science and nature programming, subject to certain
exceptions.

     Each stockholder has been granted preemptive rights on share issuances by
Discovery. Any proposed transfer of Discovery shares by a stockholder will be
subject to rights of first refusal in favor of the other stockholders, subject
to certain exceptions, with our right of first refusal being secondary under
certain circumstances. In addition, we are not permitted to hold in excess of
50% of Discovery's stock unless our increased ownership results from exercises
of our preemptive rights or rights of first refusal.

COURTROOM TELEVISION NETWORK, LLC.

     Courtroom Television Network, LLC owns and operates Court TV, a basic cable
network that provides informative and entertaining programming based on the
American legal system. Court TV's day-time programming focuses on trial
coverage. Night-time programming includes reality-based documentary specials,
off-network series such as NYPD Blue, original programming such as Forensic
Files and original movies such as Guilt by Association and The Interrogation of
Michael Crow. CourtTV was launched in 1991, and as of December 31, 2003 had
nearly 80 million subscribers. CourtTV earns revenue from the sale of
advertising on its network, from affiliation agreements with cable television
and direct-to-home satellite operators and by

                                       I-16
<PAGE>

licensing its programs for international distribution. At December 31, 2003,
CourtTV's affiliation agreements have remaining terms of two to six years and
provide for payments based on the number of subscribers that receive CourtTV's
services. No single distributor represented more than 10% of CourtTV's
consolidated revenue for 2003.

     We and Time Warner Entertainment each own 50% of Court Television. Pursuant
to Court Television's operating agreement, no action may be taken with respect
to certain material matters without our approval and that of Time Warner
Entertainment. Also pursuant to Court Television's operating agreement, each
member has a right of first offer with respect to any proposed transfer by the
other member of its interest in Court Television other than to an affiliate of
the transferring member or to NBC Cable Courtroom Holdings, Inc. upon exercise
of its option (as described below). In addition, at any time after January 7,
2006, we may require Time Warner Entertainment to purchase all but not less than
all of our ownership interest, and Time Warner Entertainment may require us to
sell all but not less than all of our ownership interest, in Court Television.
Furthermore, pursuant to an option agreement among us, Time Warner
Entertainment, Court Television and NBC Cable Courtroom, NBC Cable Courtroom has
the option to purchase a 50.1% voting interest in Court Television, if on or
before August 31, 2005, we and Time Warner Entertainment convert the service
distributed by Court Television into a service that provides regularly scheduled
general business or financial news or personal finance programming. In addition,
if NBC Cable Courtroom exercises its right under the option agreement and
becomes a member of Court Television, neither we nor Time Warner Entertainment
may transfer all or any part of our interest to the other, or more than 50% of
our interest to a third party, without first offering to include a portion of
NBC Cable Courtroom's membership interest in the sale.

GAME SHOW NETWORK, LLC

     Game Show Network, LLC owns and operates Game Show Network. With more than
53 million subscribers as of December 31, 2003, Game Show Network is a basic
cable network dedicated exclusively to the world of games, game playing and game
shows. Game Show Network offers 24-hour cable programming consisting of
syndicated game show favorites from its library, original programming and new
interactive game shows where viewers can compete against each other from their
own homes. Game Show Network programs more than 84 hours of interactive
television each week.

     Game Show's revenue is derived from the delivery of its programming to
subscribers under long-term affiliation agreements with cable systems and direct
broadcast satellite systems and from the sale of advertising on its network. The
majority of Game Show's affiliation agreements provide for payments based on the
number of subscribers that receive Game Show's services and expire between 2005
and 2007. Game Show is currently out of contract with an affiliate that accounts
for approximately 20% of Game Show's current subscriber base, and is in
negotiations for the renewal of such contract. For the year ended December 31,
2003, Game Show earned 14% and 11% of its total revenue from Comcast and
DirectTV, respectively.

     We and Sony Pictures Entertainment, a division of Sony Corporation of
America, which is a subsidiary of Sony Corporation, each own 50% of Game Show
Network, LLC. Game Show Network's day-to-day operations are managed by a
management committee of its board of managers. Pursuant to Game Show Network's
operating agreement, we have the right to designate three of the management
committee's six members. Also pursuant to the operating agreement, we and Sony
have agreed that direct transfers of our interests in Game Show Network and
certain indirect transfers that result in a change of control of the
transferring party are subject to a right of first refusal in favor of the
non-transferring member.

THE NEWS CORPORATION LIMITED

     News Corp. is a diversified international media and entertainment company
with operations in eight industry segments, including filmed entertainment,
television, cable network programming, direct broadcast satellite television,
magazines and inserts, newspapers, book publishing and other. News Corp.'s
activities are conducted principally in the United States, the United Kingdom
and Italy, Latin America and Asia, Australia and the Pacific Basin. News Corp.
is a holding company that conducts all of its activities through subsidiaries

                                       I-17
<PAGE>

and affiliates. Its principal subsidiaries and affiliates are Fox Entertainment
Group, Inc., Twentieth Century Fox Film Corporation, Fox Television Holdings,
Inc., Fox Broadcasting Company, Fox Sports Networks, Inc., NDS Group plc, News
America Marketing In-Store Services, Inc., News America Marketing FSI, Inc.,
News International Limited, News Limited, HarperCollins Publishers, Inc.,
HarperCollins Publishers Limited, STAR Group Limited, BSkyB and Hughes
Electronics Corporation.

REGULATORY MATTERS

  DOMESTIC VIDEO PROGRAMMING, INTERACTIVE TELEVISION SERVICES AND COMMUNICATIONS

  Programming and Interactive Television Services

     In the United States, the FCC regulates the providers of satellite
communications services and facilities for the transmission of programming
services, the cable television systems that carry such services, and, to some
extent, the availability of the programming services themselves through its
regulation of program licensing. Cable television systems in the United States
are also regulated by municipalities or other state and local government
authorities. Cable television companies are currently subject to federal rate
regulation on the provision of basic service, and continued rate regulation or
other franchise conditions could place downward pressure on the fees cable
television companies are willing or able to pay for programming services in
which we have interests. Regulatory carriage requirements also could adversely
affect the number of channels available to carry the programming services in
which we have an interest.

     Regulation of Program Licensing.  The Cable Television Consumer Protection
and Competition Act of 1992 (the 1992 Cable Act) directed the FCC to promulgate
regulations regarding the sale and acquisition of cable programming between
multi-channel video programming distributors (including cable operators) and
satellite-delivered programming services in which a cable operator has an
attributable interest. The legislation and the implementing regulations adopted
by the FCC preclude virtually all exclusive programming contracts between cable
operators and satellite programmers affiliated with any cable operator (unless
the FCC first determines the contract serves the public interest) and generally
prohibit a cable operator that has an attributable interest in a satellite
programmer from improperly influencing the terms and conditions of sale to
unaffiliated multi-channel video programming distributors. Further, the 1992
Cable Act requires that such affiliated programmers make their programming
services available to cable operators and competing multi-channel video
programming distributors such as multi-channel multi-point distribution systems,
which we refer to as MMDS, and direct broadcast satellite distributors on terms
and conditions that do not unfairly discriminate among distributors. The
Telecommunications Act of 1996 extended these rules to programming services in
which telephone companies and other common carriers have attributable ownership
interests. The FCC revised its program licensing rules by implementing a damages
remedy in situations where the defendant knowingly violates the regulations and
by establishing a timeline for the resolution of complaints, among other things.
Our ownership of Liberty Cablevision of Puerto Rico, Inc. and Comcast's
ownership in us presently subject us and satellite-delivered programming
services in which we have an interest to these rules.

     Regulation of Carriage of Programming.  Under the 1992 Cable Act, the FCC
has adopted regulations prohibiting cable operators from requiring a financial
interest in a programming service as a condition to carriage of such service,
coercing exclusive rights in a programming service or favoring affiliated
programmers so as to restrain unreasonably the ability of unaffiliated
programmers to compete.

     Regulation of Ownership.  The 1992 Cable Act required the FCC, among other
things, (1) to prescribe rules and regulations establishing reasonable limits on
the number of channels on a cable system that will be allowed to carry
programming in which the owner of such cable system has an attributable interest
and (2) to consider the necessity and appropriateness of imposing limitations on
the degree to which multi-channel video programming distributors (including
cable operators) may engage in the creation or production of video programming.
In 1993, the FCC adopted regulations limiting carriage by a cable operator of
national programming services in which that operator holds an attributable
interest to 40% of the first 75 activated channels on each of the cable
operator's systems. The rules provided for the use of two additional channels or
a 45% limit, whichever is greater, provided that the additional channels carried
minority-controlled programming services. The regulations also grandfathered
existing carriage arrangements that exceeded the

                                       I-18
<PAGE>

channel limits, but required new channel capacity to be devoted to unaffiliated
programming services until the system achieved compliance with the regulations.
These channel occupancy limits applied only up to 75 activated channels on the
cable system, and the rules did not apply to local or regional programming
services. However, on March 2, 2001, the United States Court of Appeals for the
District of Columbia Circuit found that the FCC had failed to justify adequately
the channel occupancy limit, vacated the FCC's decision and remanded the rule to
the FCC for further consideration. In response to the Court's decision, the FCC
issued a further notice of proposed rulemaking in 2001 to consider channel
occupancy limitations. Even if these rules were readopted by the FCC, they would
have little impact on programming companies in which we have interests based
upon our current attributable ownership interests in cable systems. However, if
Comcast increased its ownership in us to 5% of the voting power of our shares,
such rules, if readopted, may have a significant impact. In the original
rulemaking, the FCC concluded that additional restrictions on the ability of
multi-channel distributors to engage in the creation or production of video
programming were then unwarranted.

     In its March 2, 2001 decision, the Court of Appeals also vacated the FCC's
rule imposing a thirty percent limit on the number of subscribers served by
systems nationwide in which a multiple system operator can have an attributable
ownership interest. The FCC presently is conducting a rulemaking regarding this
ownership limitation and its ownership attribution standards.

     The FCC's rules also generally had prohibited common ownership of a cable
system and broadcast television station with overlapping service areas. On
February 19, 2002, the United States Court of Appeals for the District of
Columbia Circuit held that the FCC's decision to retain the cable/broadcast
cross-ownership rule was arbitrary and capricious and vacated the rule. The FCC
did not seek Supreme Court review of this decision or initiate a new rulemaking
proceeding. Again, any such restrictions would have little impact on us based on
our present limited ownership of cable systems and Comcast's current limited
interest in us. The FCC rules continue to prohibit common ownership of a cable
system and MMDS with overlapping service areas.

     Regulation of Carriage of Broadcast Stations.  The 1992 Cable Act granted
broadcasters a choice of must carry rights or retransmission consent rights. The
rules adopted by the FCC generally provided for mandatory carriage by cable
systems of all local full-power commercial television broadcast signals
selecting must carry rights and, depending on a cable system's channel capacity,
non-commercial television broadcast signals. Such statutorily mandated carriage
of broadcast stations coupled with the provisions of the Cable Communications
Policy Act of 1984, which require cable television systems with 36 or more
"activated" channels to reserve a percentage of such channels for commercial use
by unaffiliated third parties and permit franchise authorities to require the
cable operator to provide channel capacity, equipment and facilities for public,
educational and government access channels, could adversely affect some or
substantially all of the programming companies in which we have interests by
limiting the carriage of such services in cable systems with limited channel
capacity. On January 18, 2001, the FCC adopted rules relating to the cable
carriage of digital television signals. Among other things, the rules clarify
that a digital-only television station can assert a right to analog or digital
carriage on a cable system. The FCC initiated a further proceeding to determine
whether television stations may assert rights to carriage of both analog and
digital signals during the transition to digital television and to carriage of
all digital signals. The imposition of such additional must carry regulation, in
conjunction with the current limited cable system channel capacity, would make
it likely that cable operators will be forced to drop some cable programming
services, which may have an adverse impact on the programming companies in which
we have interests.

     Closed Captioning and Video Description Regulation.  The Telecommunications
Act of 1996 also required the FCC to establish rules and an implementation
schedule to ensure that video programming is fully accessible to the hearing
impaired through closed captioning. The rules adopted by the FCC will require
substantial closed captioning over an eight to ten year phase-in period, which
began in 2000, with only limited exemptions. As a result, the programming
companies in which we have interests are expected to incur significant
additional costs for closed captioning. In July 2000, the FCC also adopted rules
requiring certain broadcasters and the largest national video programming
services to begin to provide audio descriptions of visual events for the
visually impaired on the secondary audio program. However, the United States
Court of

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<PAGE>

Appeals for the District of Columbia Circuit held that the description rules
were unauthorized by statute and vacated them on November 8, 2002.

     Copyright Regulation.  The programming companies in which we have interests
must obtain any necessary music performance rights from the rights holders.
These rights generally are controlled by the music performance rights
organizations of the American Society of Composers, Authors and Publishers
("ASCAP"), Broadcast Music, Inc. ("BMI") and the Society of European Stage
Authors and Composers ("SESAC"), each with rights to the music of various
artists. Although the programming companies in which we have interests generally
have obtained the necessary rights through separate agreements with ASCAP, BMI
and SESAC, certain of the agreements are being negotiated on an industry-wide
basis, including new rate structures that may require retroactive rate
increases. Certain of the programming companies also have obtained licenses for
music performance rights outside the United States through various licensing
agencies located in the foreign countries in which their services are
distributed. DMX Music's service, which involves the distribution of copyrighted
music, relies heavily upon its ability to negotiate such license agreements
domestically and in foreign countries.

     Satellites and Uplink.  In general, authorization from the FCC must be
obtained for the construction and operation of a communications satellite. The
FCC authorizes utilization of satellite orbital slots assigned to the United
States by the World Administrative Radio Conference. Such slots are finite in
number, thus limiting the number of carriers that can provide satellite
transponders and the number of transponders available for transmission of
programming services. At present, however, there are numerous competing
satellite service providers that make transponders available for video services
to the cable industry. The FCC also regulates the earth stations uplinking to
and/or downlinking from such satellites.

  Satellite

     We have an interest in a company licensed by the FCC to provide Ka-band
satellite services. Ka-band licensees must, among other requirements, comply
with FCC implementation milestones for the construction, launch and operation of
their systems. Failure to meet any of these milestones would render the
satellite authorization null and void.

  Internet Services

     The Internet companies in which we have interests are subject, both
directly and indirectly, to various laws and governmental regulations relating
to their respective businesses. There are currently few laws or regulations
directly applicable to access to or commerce on commercial online services or
the Internet. For example, the Digital Millennium Copyright Act, enacted into
law in 1998, protects certain qualifying online service providers from copyright
infringement liability, and, under the Communications Decency Act, an Internet
service provider will not be treated as the publisher or speaker of any
information provided by another information content provider. Although the
Internet Tax Freedom Act, which placed a moratorium on state and local taxes on
Internet access and commerce, expired in November 2003, legislation to extend
permanently the tax moratorium is under consideration in Congress.

     On February 12, 2004, the FCC found that an entirely Internet-based voice
service is an information service subject to the FCC's jurisdiction. The FCC
also adopted a notice of proposed rulemaking to examine a variety of regulatory
and policy issues relating to voice services provided over the Internet.

     Other Internet-related laws and regulations may cover issues such as user
privacy, defamatory speech, copyright infringement, pricing and characteristics
and quality of products and services. The adoption of such laws or regulations
in the future may slow the growth of commercial online services and the
Internet, which could in turn cause a decline in the demand for the services and
products of the Internet companies in which we have interests and increase such
companies' costs of doing business or otherwise have an adverse effect on their
businesses, operating results and financial conditions. Moreover, the
applicability to commercial online services and the Internet of existing laws
governing issues such as property ownership, libel, personal privacy and
taxation is uncertain and could expose these companies to substantial liability.

                                       I-20
<PAGE>

  Other Regulation

     We also have significant ownership interests on a cost basis in other
entities, such as The News Corporation Limited and Sprint PCS Group, which are
extensively regulated. For example, the broadcast stations owned and the direct
broadcast satellite service controlled by News Corp. are subject to a variety of
FCC regulations. Sprint PCS Group is subject not only to federal regulation but
also to regulation in varying degrees, depending on the jurisdiction, by state
and local regulatory authorities.

  INTERNATIONAL VIDEO PROGRAMMING, INTERACTIVE TELEVISION SERVICES AND
  COMMUNICATIONS

     Some of the foreign countries in which we have, or may make, an investment
regulate, in varying degrees, (1) the granting of cable and telephony
franchises, the construction of cable and telephony systems and the operations
of cable, other multi-channel television operators and telephony operators and
service providers, as well as the acquisition of, and foreign investments in,
such operators and service providers, (2) the granting of broadcast licenses and
the applicable terms and regulations, and (3) the distribution and content of
programming and Internet services and foreign investment in programming
companies. Regulations or laws may cover wireline and wireless telephony,
satellite and cable communications and Internet services, among others.
Regulations or laws that exist at the time we make an investment in a foreign
subsidiary or business affiliate may thereafter change, and there can be no
assurance that material and adverse changes in the regulation of the services
provided by our subsidiaries and business affiliates will not occur in the
future. Regulation can take the form of price controls, service requirements,
programming and other content restrictions, and restrictions on permissible
levels of foreign ownership among others. Moreover, some countries do not issue
exclusive licenses to provide multi-channel television services within a
geographic area, and in those instances we may be adversely affected by an
overbuild by one or more competing cable operators. In certain countries where
multi-channel television is less developed, there is minimal regulation of cable
television, and, hence, the protections of the cable operator's investment
available in the United States and other countries (such as rights to renewal of
franchises and utility pole attachment) may not be available in these countries.
Foreign regulation, and changes in foreign regulation, could have an adverse
effect on our business and the value of our investments.

  PROPOSED CHANGES IN REGULATION

     The regulation of programming services, cable television systems and
satellite licensees is subject to the political process and has been in constant
flux over the past decade. Further material changes in the law and regulatory
requirements must be anticipated and there can be no assurance that our business
will not be adversely affected by future legislation, new regulation or
deregulation.

COMPETITION

  INTERACTIVE GROUP

     In the U.S. and elsewhere, QVC and Home Shopping Network operate in direct
competition with each other and other businesses that are engaged in retail
merchandising. In the U.K., QVC operates in direct competition with sit-up
Limited, the operator of the home shopping channel, Screenshop, and bid-up.tv,
an interactive auction channel.

     The businesses of providing software and related technologies, content and
applications and professional services for interactive and enhanced television
are highly competitive and rapidly changing. The interactive television
technology companies with which OpenTV competes include NDS Group plc.,
Microsoft Corporation, Liberate Technologies and Scientific Atlanta. NDS Group
plc., a company controlled by News Corp., is expanding into the interactive
television platform market and recently extended its market share with the
acquisition of Media Highway from Thomson Multimedia. News Corp. also controls
BSkyB, which is one of OpenTV's largest customers, DirecTV and other satellite
operators around the world. Companies that develop interactive television
content and applications include dedicated applications providers, interactive
television technology companies, and independent third parties that develop and
provide applications for middleware platforms. Competition is also faced from
media companies that have publicly announced
                                       I-21
<PAGE>

interactive television initiatives, such as The Discovery Channel (in which we
also own an interest) and CNN. In addition, certain network operators such as
BSkyB in the United Kingdom have entered into agreements, joint ventures, and
other relationships with technology and entertainment companies. We expect
competition in the interactive content and applications area to intensify as the
general market for interactive television services further develops,
particularly in the case of independent third parties that have the ability to
develop applications for middleware platforms at relatively modest expense
through the use of applications development tools.

     In the interactive television professional services area, competition is
faced primarily from third party system integrators, as well as from internal
information technology staffs at our network operator customers. Other
interactive television technology providers also provide a level of professional
services in conjunction with their product offerings.

     The creative media services industry is highly competitive. Much of the
competition is centered in Los Angeles, California, the largest and most
competitive market, particularly for domestic television and feature film
production as well as for the management of content libraries. We expect that
competition will increase as a result of industry consolidation and alliances,
as well as the emergence of new competitors. In particular, although major
motion picture studios such as Paramount Pictures, Sony Pictures Corporation,
Twentieth Century Fox, Universal Pictures, The Walt Disney Company,
Metro-Goldwyn-Mayer and Warner Brothers are customers of these services, they
can also perform similar services in-house with substantially greater financial,
technical, creative, marketing and other resources. These studios could devote
substantially greater resources to the development and marketing of services
that compete with those of our affiliates. Our affiliates also actively compete
with certain industry participants that may be smaller but have a unique
operating niche or specialty business.

     There are numerous providers of in-room entertainment services to the hotel
industry. Market participants include, but are not limited to, (i) other full
service in-room providers, (ii) cable television companies, (iii) direct
broadcast satellite services, (iv) television networks and programmers, (v)
Internet service providers, (vi) broadband connectivity companies, (vii) other
telecommunications companies and (viii) certain hotels. In addition, On
Command's services compete for a guest's time and entertainment resources with
other forms of entertainment and leisure activities. On Command anticipates that
it will continue to face substantial competition from traditional as well as new
competitors. Many of On Command's potential competitors are developing ways to
use their existing infrastructure to provide in-room entertainment and/or
informational services. Certain of these competitors are already providing guest
programming services and are beginning to provide video-on-demand, Internet and
high-speed connectivity services to hotels.

  INTERNATIONAL GROUP

     The cable television systems and other forms of media distribution in which
we have interests directly compete for viewer attention and subscriptions in
local markets with other providers of entertainment, news and information,
including other cable television systems in those countries that do not grant
exclusive franchises, broadcast television stations, direct-to-home satellite
companies, satellite master antenna television systems, multi-channel
multi-point distribution systems and telephone companies, other sources of video
programs (such as DVDs and videocassettes) and additional sources for
entertainment news and information, including the Internet. Cable television
systems also face strong competition from all media for advertising dollars. Our
management believes that important competitive factors include fees charged for
broadband services, the quantity, quality and variety of the programming
offered, the quality of signal and call reception, broadband Internet speeds,
customer service and the effectiveness of marketing efforts.

     As discussed above, the business of distributing programming for cable and
satellite television is highly competitive in foreign countries. Please refer to
the information included under the immediately following "-- Networks Group."

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  NETWORKS GROUP

     The business of distributing programming for cable and satellite television
is highly competitive, both in the United States and in foreign countries. The
programming companies in which we have interests directly compete with other
programmers for distribution on a limited number of channels. Increasing
concentration in the multichannel video distribution industry, including the
combination of AT&T Broadband and Comcast Cable, could adversely affect the
programming companies in which we have interests by reducing the number of
distributors to whom they sell their programming, subjecting more of their
programming sales to volume discounts and increasing the distributors'
bargaining power in negotiating new affiliation agreements. Once distribution is
obtained, our programming services and our business affiliates' programming
services compete, in varying degrees, for viewers and advertisers with other
cable and off-air broadcast television programming services as well as with
other entertainment media, including home video, pay-per-view services, online
activities, movies and other forms of news, information and entertainment. The
programming companies in which we have interests also compete, to varying
degrees, for creative talent and programming content. Our management believes
that important competitive factors include the prices charged for programming,
the quantity, quality and variety of the programming offered and the
effectiveness of marketing efforts.

EMPLOYEES

     As of December 31, 2003, we had approximately 70 corporate employees, and
our consolidated subsidiaries had an aggregate of approximately 17,600
employees. We believe that our employee relations are good.

     (d) Financial Information About Geographic Areas

     For financial information related to the geographic areas in which we do
business, see note 18 to our consolidated financial statements found in Part II
of this report.

     (e) Available Information

     All of our filings with the Securities and Exchange Commission (the "SEC"),
including our Form 10-Ks, Form 10-Qs and Form 8-Ks, as well as amendments to
such filings are available on our Internet website free of charge generally
within 24 hours after we file such material with the SEC. Our website address is
www.libertymedia.com. The information contained on our website is not
incorporated by reference herein.

ITEM 2.  PROPERTIES

     We own our corporate headquarters in Englewood, Colorado. All of our other
real or personal property is owned or leased by our subsidiaries and business
affiliates.

     QVC owns its corporate headquarters and operations center in West Chester,
Pennsylvania. It also owns call centers in San Antonio, Texas, Port St. Lucie,
Florida, Chesapeake, Virginia and Bochum, Germany, as well as a call center and
warehouse in Knowsley, United Kingdom. QVC owns a warehouse in Hucklehoven,
Germany and distribution centers in Lancaster, Pennsylvania, Suffolk, Virginia
and Rocky Mount, North Carolina. QVC leases outlet space throughout the United
States and the United Kingdom, office space in London, Japan and Germany and a
warehouse in Japan.

     Starz Encore owns its corporate headquarters in Englewood, Colorado. In
addition, Starz Encore leases office space for its sales staff at 10 locations
throughout the United States.

     Ascent Media owns or leases over 100 facilities. Domestically, Ascent Media
leases facilities with approximately 975,000 square feet and owns facilities
with approximately 360,000 square feet. Outside of the United States, Ascent
Media leases facilities with approximately 250,000 square feet and owns
facilities with 50,000 square feet. Nearly all of Ascent Media's facilities are
built specifically for their technical and creative service operations.

     On Command leases its corporate headquarters in Denver, Colorado; and has
leased 77,000 square feet and 131,000 square feet of light manufacturing and
storage space in Denver, Colorado and San Jose,

                                       I-23
<PAGE>

California, respectively. On Command also has a number of small leases
throughout the United States, Canada and Mexico.

     Our other subsidiaries and business affiliates own or lease the fixed
assets necessary for the operation of their respective businesses, including
office space, transponder space, headends, cable television and
telecommunications distribution equipment, telecommunications switches and
customer equipment (including converter boxes). Our management believes that our
current facilities are suitable and adequate for our business operations for the
foreseeable future.

ITEM 3.  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 is seeking damages in an
unspecified amount. We believe all such claims to be without merit and, together
with Messrs. Malone and Bennett, have filed an answer denying any liability to
Klesch. We also have asserted counterclaims against Klesch seeking, among other
things, a declaratory judgment to the effect that because Klesch has breached
and repudiated an agreement that we entered into with Klesch in June 2001, we
are relieved of any obligations that we might have to Klesch under that
agreement. Those obligations would include, among other things, the obligation
in certain events to pay to Klesch, as its sole compensation, fees equal to 3%
of the value of specified assets acquired by us from Deutsche Telekom before the
second anniversary of the date of that agreement, subject to an aggregate cap of
Euro 165 million. Klesch has filed a reply denying all our counterclaims. In
September 2002, we asserted counterclaims against Klesch's principal owner, A.
Gary Klesch, alleging fraud and negligent misrepresentation. Mr. Klesch has
filed a motion to dismiss the counterclaims, alleging lack of personal
jurisdiction. The parties have completed their discovery, and a jury trial is
scheduled to commence on September 7, 2004.

     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. The amended and restated agreement
replaced a prior agreement that had been entered into in connection with Liberty
Digital's acquisition of DMX Inc. In that acquisition, DMX shareholders received
Liberty Digital shares and the right to require AT&T Broadband to purchase those
shares upon satisfaction of specified conditions. In addition to granting those
put rights, AT&T Broadband also agreed to cause its cable system subsidiaries to
assign to Liberty Digital all revenue from the distribution of DMX music
services to AT&T Broadband's customers. AT&T Broadband received 62.5 million
shares of Liberty Digital common stock and a $40 million note payable by Liberty
Digital in exchange for granting the put rights and causing its subsidiaries to
make the revenue assignment.

     The amended and restated contribution agreement modified the prior
agreement in various respects, including, among others, limiting the category of
revenue assigned by the TCI cable system subsidiaries to analog distribution
revenue, imposing a requirement for payments in a fixed amount, subject to
cost-of-living increases, and setting a term during which such payments would be
required. The amended and restated agreement was entered into in connection with
our acquisition of substantially all of AT&T Broadband's Liberty Digital stock
in exchange for an $80 million promissory note and our agreement to assume AT&T
Broadband's obligations with respect to the put rights granted to DMX
shareholders, together with other agreements among the parties or their
affiliates.

                                       I-24
<PAGE>

     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. On March 5,
2003, the defendants filed an answer denying all of Liberty Digital's claims.
The parties are engaged in discovery and the matter has been set for trial in
June 2004.

     Liberty Digital will vigorously prosecute its claims against AT&T Broadband
and Comcast Corporation and believes that it will be successful in enforcing its
rights under the amended and restated contribution agreement. There is, however,
no assurance that Liberty Digital will achieve a favorable result in this
litigation.

     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 our chairman, John C. Malone, to a lawsuit
they had initiated against Deutsche Bank and Dr. Breuer on February 3, 2003. The
lawsuit, which is pending in the United States District Court for the Southern
District of New York, is alleging, 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 effected 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 are seeking damages in an unspecified amount. We
believe all such claims to be without merit and, together with Dr. Malone, have
filed a motion to dismiss, on which the court has not yet ruled.

     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 vindicate our contractual rights. NBC is expected to respond to
our complaint by March 25, 2004. We will vigorously

                                       I-25
<PAGE>

prosecute our claims against NBC and believe that we will be successful in
enforcing our rights. There is, however, no assurance that we will achieve a
favorable result in this litigation.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

     None.

                                       I-26
<PAGE>

                                    PART II.

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

     We have two series of common stock, Series A and Series B, which trade on
the New York Stock Exchange under the symbols L and LMC.B, respectively. The
following table sets forth the range of high and low sales prices of shares of
our Series A and Series B common stock for the years ended December 31, 2003 and
2002.

<Table>
<Caption>
                                                        SERIES A          SERIES B
                                                     ---------------   ---------------
                                                      HIGH     LOW      HIGH     LOW
                                                     ------   ------   ------   ------
<S>                                                  <C>      <C>      <C>      <C>
2003
  First quarter....................................  $10.38   $ 8.45   $10.60   $ 8.65
  Second quarter...................................  $12.25   $ 9.52   $12.25   $ 9.50
  Third quarter....................................  $12.27   $ 9.86   $12.47   $10.11
  Fourth quarter...................................  $12.20   $ 9.78   $14.05   $ 9.90
2002
  First quarter....................................  $15.03   $11.90   $15.90   $12.65
  Second quarter...................................  $12.80   $ 7.70   $13.49   $ 8.23
  Third quarter....................................  $ 9.60   $ 6.16   $ 9.75   $ 6.38
  Fourth quarter...................................  $10.75   $ 6.29   $11.00   $ 6.40
</Table>

     As of January 30, 2004, there were approximately 12,000 and 400 record
holders of our Series A common stock and Series B common stock, respectively
(which amounts do not include the number of shareholders whose shares are held
of record by banks, brokerage houses or other institutions, but include each
such institution as one shareholder).

     We have not paid any cash dividends on our Series A common stock and Series
B common stock, and we have no present intention of so doing. Payment of cash
dividends, if any, in the future will be determined by our Board of Directors in
light of our earnings, financial condition and other relevant considerations.

     On November 28, 2003, we acquired all of the outstanding stock of TP
Investment, Inc. in exchange for 5,281,739 shares of our Series B Common Stock.
TP Investment is a corporation that, prior to the acquisition, was wholly owned
by a limited liability company in which the sole member is John C. Malone, the
chairman of our board of directors. The agreed value of the TP Investment stock
acquired was $60,740,000. We believe this transaction was exempt from the
registration requirements of the Securities Act by virtue of Section 4(2) of the
Securities Act since it was not a public offering.

                                       II-1
<PAGE>

ITEM 6.  SELECTED FINANCIAL DATA.

     The following tables present selected historical information relating to
our financial condition and results of operations for the past five years. The
following data should be read in conjunction with our consolidated financial
statements. We were a wholly-owned subsidiary of Tele-Communications, Inc. from
August 1994 to March 9, 1999. On March 9, 1999, AT&T Corp. acquired TCI in a
merger transaction. For financial reporting purposes, the AT&T Merger is deemed
to have occurred on March 1, 1999. In connection with the merger, our assets and
liabilities were adjusted to their respective fair values pursuant to the
purchase method of accounting. Selected financial data for the two months ended
February 28, 1999 has been excluded from the following table.

<Table>
<Caption>
                                                                DECEMBER 31,
                                               -----------------------------------------------
                                               2003(1)    2002      2001      2000      1999
                                               -------   -------   -------   -------   -------
                                                            (AMOUNTS IN MILLIONS)
<S>                                            <C>       <C>       <C>       <C>       <C>
Summary Balance Sheet Data:
Investments in available-for-sale securities
  and other cost investments.................  $19,949   $14,369   $21,152   $16,774   $27,906
Investment in affiliates.....................  $ 5,354   $ 7,390   $10,076   $20,464   $15,922
Total assets.................................  $54,013   $39,685   $48,539   $54,268   $58,658
Long-term debt...............................  $ 9,482   $ 4,316   $ 4,764   $ 5,269   $ 2,723
Stockholders' equity.........................  $28,842   $24,682   $30,123   $34,109   $38,408
</Table>

<Table>
<Caption>
                                                                                     TEN MONTHS
                                                  YEARS ENDED DECEMBER 31,             ENDED
                                            -------------------------------------   DECEMBER 31,
                                            2003(1)    2002      2001      2000         1999
                                            -------   -------   -------   -------   ------------
                                              (AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S>                                         <C>       <C>       <C>       <C>       <C>
Summary Statement of Operations Data:
Revenue...................................  $ 4,028   $ 2,084   $ 2,059   $ 1,526     $   729
Operating income (loss)(2)................  $  (956)  $  (184)  $(1,127)  $   436     $(2,214)
Share of earnings (losses) of affiliates,
  net(3)..................................  $    58   $  (453)  $(4,906)  $(3,485)    $  (904)
Nontemporary declines in fair value of
  investments.............................  $   (29)  $(6,053)  $(4,101)  $(1,463)    $    --
Realized and unrealized gains (losses) on
  financial instruments, net..............  $  (649)  $ 2,122   $  (174)  $   223     $  (153)
Gains (losses) on dispositions, net.......  $ 1,128   $  (415)  $  (310)  $ 7,340     $     4
Net earnings (loss)(2)(3).................  $(1,222)  $(5,330)  $(6,203)  $ 1,485     $(2,021)
Basic and diluted net earnings (loss) per
  common share(4).........................  $  (.44)  $ (2.06)  $ (2.40)  $   .57     $  (.78)
</Table>

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

(1) On September 17, 2003, we completed our acquisition of Comcast Corporation's
    approximate 56.5% ownership in QVC, Inc. for approximately $7.9 billion,
    comprised of cash, Floating Rate Senior Notes and shares of our Series A
    common stock. When combined with our previous ownership of approximately
    41.7% of QVC, we owned 98.2% of QVC upon consummation of the transaction,
    which is deemed to have occurred on September 1, 2003, and we have
    consolidated QVC's financial position and results of operations since that
    date.

(2) Effective January 1, 2002, we adopted Statement of Financial Accounting
    Standards No. 142, Goodwill and Other Intangible Assets, which among other
    matters, provides that goodwill and other indefinite-lived assets no longer
    be amortized. Amortization expense for such assets aggregated $627 million,
    $598 million and $438 million for the years ended December 31, 2001 and 2000
    and the ten months ended December 31, 1999, respectively.

(3) Included in share of losses of affiliates are other-than-temporary declines
    in value aggregating $84 million, $148 million and $2,396 million for the
    years ended December 31, 2003, 2002, and 2001, respectively. In addition,
    share of losses of affiliates includes excess basis amortization of $798
    million, $1,058 million and $463 million for the years ended December 31,
    2001, 2000 and the ten months ended

                                       II-2
<PAGE>

    December 31, 1999, respectively. Pursuant to Statement 142, excess costs
    that are considered equity method goodwill are no longer amortized, but are
    evaluated for impairment under APB Opinion No. 18.

(4) The basic and diluted net earnings (loss) per common share for periods prior
    to August 10, 2001, the date of our split off from AT&T, is based upon 2,588
    million shares of our Series A and Series B common stock issued upon
    consummation of the split off.

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS.

     The following discussion and analysis provides information concerning our
results of operations and financial condition. This discussion should be read in
conjunction with our accompanying consolidated financial statements and the
notes thereto.

OVERVIEW

     We are a holding company that owns majority and minority interests in a
broad range of electronic retailing, video programming, broadband distribution
and other communications companies. During the second half of 2003, we started
changing our corporate focus to control more of our affiliated companies. The
first step in this process was our September 2003 acquisition of Comcast
Corporation's approximate 56% ownership interest in QVC, Inc., which when
combined with our previous 42% ownership interest, gave us over 98% control of
QVC, and we now consolidate the financial position and results of operations of
QVC. In January 2004, we acquired all of the outstanding shares of Class B
common stock of UnitedGlobalCom, Inc. from UGC's founding shareholders.
Previously in December 2003, UGC completed the acquisition of all of the
outstanding shares of UGC Europe, Inc. that it did not already own. As a result
of these two transactions and our exercise of certain pre-emptive rights, UGC
owns 100% of the outstanding common stock of UGC Europe and we own approximately
55% of the outstanding common stock of UGC representing approximately 92% of the
voting power of UGC's shares. We began consolidating the operations of UGC
effective January 1, 2004. In the fourth quarter of 2003, to further align our
corporate structure with our operating assets, we organized our businesses into
four Groups: Interactive Group, International Group, Networks Group and
Corporate and Other. See "Business -- Narrative Description of Business"
included in Part I of this Annual Report on Form 10-K for a description of the
more significant businesses in each of these Groups.

     Our primary businesses in the Interactive Group are QVC and Ascent Media
Group, Inc. In addition, we own approximately 20% of InterActiveCorp, which we
account for as an available-for-sale security. In evaluating the prospects and
risks for QVC, our primary focus is currently on the following: potential
opportunities to expand the QVC footprint in international markets, and new
domestic marketing concepts to capitalize on the growing Internet market. During
2003, the growth in QVC's domestic revenue leveled off, as compared to recent
years. During 2004, our goal will be to continue QVC's international expansion
by increasing (1) the number of customers who have access to and use our service
and (2) the average sales per customer. In addition we hope to find new
opportunities for domestic growth, including Internet sales.

     Our primary businesses in the International Group are UGC, which provides
broadband services primarily in Europe; Jupiter Telecommunications ("J-COM"),
which provides broadband services in Japan and Jupiter Programming ("JPC"),
which provides video programming in Japan, all of which were equity affiliates
at December 31, 2003. Our consolidated subsidiaries in the International Group
at December 31, 2003 are Liberty Cablevision of Puerto Rico and Pramer S.C.A. We
believe our primary opportunities in our international markets include continued
growth in subscribers; increasing the average revenue per unit by continuing to
rollout telephony, Internet and digital video; developing foreign programming
businesses, including international expansion of our domestic networks, to
distribute over our broadband systems; and maximizing operating efficiencies on
a regional basis. Potential impediments to achieving these goals include
increasing price competition for broadband services; alternative video
technologies; and available capital to finance the proposed rollout of new
services.

     Our primary businesses in the Networks Group are Starz Encore Group LLC,
Discovery Communications, Inc., Courtroom Television Network, LLC and GSN
(formerly, Game Show Network). In addition we own approximately 18% of The News
Corporation Limited, which we account for as an

                                       II-3
<PAGE>

available-for-sale security. We view the development of digital and interactive
services, our ability to expand these networks and increase distribution over
our international distribution footprint, as mentioned above, 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; the impact
on viewer habits of new technologies such as video on demand and personal video
recorders; and alternative movie and programming sources.

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

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

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

                                       II-4
<PAGE>

SUMMARY 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.

  CONSOLIDATED OPERATING RESULTS

<Table>
<Caption>
                                                            YEARS ENDED DECEMBER 31,
                                                           --------------------------
                                                            2003      2002     2001
                                                           -------   ------   -------
                                                             (AMOUNTS IN MILLIONS)
<S>                                                        <C>       <C>      <C>
REVENUE
Interactive Group........................................  $ 2,798   $  794   $   832
International Group......................................      107      100       138
Networks Group...........................................    1,114    1,145     1,030
Corporate and Other......................................        9       45        59
                                                           -------   ------   -------
  Consolidated revenue...................................  $ 4,028   $2,084   $ 2,059
                                                           =======   ======   =======
OPERATING CASH FLOW
Interactive Group........................................  $   496   $   61   $    76
International Group......................................       27       26        42
Networks Group...........................................      381      374       327
Corporate and Other......................................      (72)     (37)      (68)
                                                           -------   ------   -------
  Consolidated operating cash flow.......................  $   832   $  424   $   377
                                                           =======   ======   =======
OPERATING INCOME (LOSS)
Interactive Group........................................  $   139   $ (339)  $  (528)
International Group......................................       12       11       (36)
Networks Group...........................................      248      189        49
Corporate and Other......................................   (1,355)     (45)     (612)
                                                           -------   ------   -------
  Consolidated operating loss............................  $  (956)  $ (184)  $(1,127)
                                                           =======   ======   =======
</Table>

     Revenue.  Our consolidated revenue increased 93.3% and 1.2% in 2003 and
2002, respectively, as compared to the corresponding prior year. The 2003
increase is due primarily to QVC, which recognized $1,973 million of revenue
since our acquisition in September. In addition, revenue for the Interactive
Group increased $45 million due to our acquisition of OpenTV Corp. in August
2002 and decreased $30 million at Ascent Media. The Networks Group revenue
decreased due primarily to a reduction in rates in former AT&T Broadband systems
resulting from the re-negotiation of Starz Encore's affiliation agreement with
Comcast in 2003. The increase in consolidated revenue in 2002 was primarily the
net result of a 9.5% increase in Starz Encore's revenue partially offset by a
9.3% decrease in Ascent Media's revenue. 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 ("SG&A")
expenses (excluding stock compensation). Our chief operating decision maker and
management team use this measure of performance in conjunction with other
measures applied on a Group by Group basis to evaluate our businesses and make
decisions about allocating resources among our businesses. We believe this is an
important indicator of the operational strength and performance of our
businesses, including the ability to service debt and fund capital expenditures.
In addition, this measure allows us to view operating results, perform
analytical comparisons and benchmarking between businesses and identify
strategies to improve performance. This measure of performance excludes such
costs as depreciation and amortization, stock compensation and impairments of
long-lived assets that are included

                                       II-5
<PAGE>

in the measurement of operating income pursuant to general accepted accounting
principles ("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. See footnote 18 to the
accompanying consolidated financial statements for a reconciliation of Operating
Cash Flow to Earnings Before Income Taxes and Minority Interest.

     Consolidated Operating Cash Flow increased 96.2% and 12.5% in 2003 and
2002, respectively, as compared to the corresponding prior year. The increase in
2003 is due primarily to our acquisition of QVC, which contributed $434 million
to our consolidated Operating Cash Flow. This increase was partially offset by a
decrease in our Corporate and Other Group, which resulted from lower revenue
from ancillary sources and higher legal and consulting expenses. The 2002
increase is primarily the net effect of a $58 million increase in Starz Encore's
Operating Cash Flow and lower corporate SG&A expenses of $28 million, partially
offset by a $44 million operating cash flow deficit at OpenTV, which was
acquired in 2002. The decrease in corporate SG&A expenses in 2002 resulted from
the sale of certain business units in 2002 and expenses incurred in 2001 related
to our split-off from AT&T Corp.

     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. In connection with our rights offering in the fourth
quarter of 2002 and pursuant to the antidilution provisions of the stock
incentive plans we administer, the number of shares and the applicable exercise
prices of all of our options were adjusted as of October 31, 2002, the record
date for the rights offering. As a result of these modifications, all of our
outstanding options are now accounted for as variable plan awards. 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 decrease in stock compensation in 2003 is
primarily a result of a decrease in the equity value of Starz Encore. The
expense reflected in the table is based on the market price of the underlying
common stock as of the date of the financial statements and is subject to future
adjustment based on market price fluctuations, vesting percentages and,
ultimately, on the final determination of market value when the options are
exercised.

     Depreciation and Amortization.  The increase in depreciation in 2003 is due
to increases in our depreciable asset base resulting from (1) the acquisition of
QVC and (2) capital expenditures. The increase in amortization in 2003 is due
primarily to the acquisition of QVC and amortization of the related intangible
assets. Effective January 1, 2002, Liberty and its subsidiaries adopted
Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets. Statement 142 provides that goodwill and indefinite lived
intangibles are no longer amortized, but are evaluated periodically for
impairment. The decrease in amortization in 2002 is due to the adoption of
Statement 142 and the resulting elimination of goodwill amortization.

     Impairment of Long-lived Assets.  Starz Encore received an independent
third party valuation in connection with its annual year-end evaluation of the
recoverability of its goodwill. The result of this valuation, which was based on
a discounted cash flow analysis of projections prepared by the management of
Starz Encore, indicated that the fair value of this reporting unit was less than
its carrying value including goodwill. This reporting unit fair value was then
used to calculate an implied value of the goodwill related to Starz Encore. The
$1,352 million excess of the carrying amount of the goodwill (including $1,195
million of allocated enterprise-level goodwill) over its implied value has been
recorded as an impairment charge in the fourth quarter of 2003. Starz Encore's
operating income includes $157 million of the foregoing impairment charge and
$1,195 million is included in Corporate and Other. The reduction in the value of
Starz Encore reflected in the third party valuation is believed to be
attributable to a number of factors. Those factors include the reliance placed
in that valuation on projections by management reflecting a lower rate of
revenue growth compared to earlier projections based, among other things, on the
possibility that revenue growth may be negatively affected by (1) a reduction in
the rate of growth in total digital video subscribers and in the subscription
video on demand business as a result of cable operators' increased focus on the
marketing and
                                       II-6
<PAGE>

sale of other services, such as high speed internet access and telephony, and
the uncertainty as to the success of marketing efforts by distributors of Starz
Encore's services and (2) lower per subscriber rates under the new affiliation
agreement with Comcast, as compared to the payments required under the 1997 AT&T
Broadband Affiliation Agreement (including the programming pass through
provision).

     During the years ended December 31, 2002 and 2001, we determined that the
carrying value of certain of our subsidiaries' assets exceeded their respective
fair values. Accordingly, in 2002 we recorded impairments of goodwill related to
OpenTV ($92 million), Ascent Media ($84 million), our Latin American
consolidated and equity investments ($46 million), DMX Music ($44 million) and
On Command Corporation ($9 million). Such impairments were calculated as the
difference between the carrying value and the estimated fair value of the
related assets. In 2001, we recorded impairments of (1) Ascent Media's property
and equipment and goodwill of $313 million and (2) goodwill of $75 million
primarily related to the devaluation of the Argentine peso and the impact of
such devaluation on Pramer, our wholly-owned Argentine programming subsidiary.

     Operating Income (Loss).  Consolidated operating loss increased $772
million in 2003 and decreased $943 million in 2002, as compared to the
corresponding prior year. The increase in 2003 is due to the impairment of Starz
Encore's goodwill partially offset by the operating income of QVC from the date
of its acquisition. The decrease in 2002 is due primarily to (1) our adoption of
Statement 142 and the resulting elimination of amortization on indefinite lived
intangible assets and goodwill, (2) a decrease in stock compensation expense and
(3) lower impairment charges.

  Other Income and Expense

     Interest expense.  Interest expense was $539 million, $423 million and $525
million, for the years ended December 31, 2003, 2002 and 2001, respectively,
including $61 million, $7 million and $6 million, respectively, of accretion of
our exchangeable debentures. The remaining increase in interest expense in 2003
is due primarily to an increase in our debt balance in 2003. The decrease in
2002 is due to a lower average debt balance in 2002 and lower interest rates on
certain variable-rate subsidiary and parent company bank debt.

     Dividend and interest income.  Dividend and interest income was $189
million, $209 million and $272 million for the years ended December 31, 2003,
2002 and 2001, respectively. The 2002 decrease is the net effect of lower
interest rates on invested cash balances, offset by increases due to dividends
from our Vivendi Universal and News Corp. investments. In 2001, we also earned
interest on certain debt securities that we purchased in the second and third
quarter of 2001. The majority of these debt securities were contributed to UGC
in January 2002. Interest and dividend income for the year ended December 31,
2003 was comprised of interest income earned on invested cash ($61 million),
dividends on News Corp. American Depository Shares ("ADSs") ($40 million),
dividends on ABC Family Worldwide preferred stock ($31 million) and other ($57
million).

                                       II-7
<PAGE>

     Investments in Affiliates Accounted for Using the Equity Method.  Our share
of earnings (losses) of affiliates was $58 million, ($453) million and ($4,906)
million during the years ended December 31, 2003, 2002 and 2001, respectively. A
summary of our share of losses of affiliates, including nontemporary declines in
value and excess cost amortization, is included below:

<Table>
<Caption>
                                                  PERCENTAGE
                                                 OWNERSHIP AT    YEARS ENDED DECEMBER 31,
                                                 DECEMBER 31,   --------------------------
                                                     2003        2003     2002      2001
                                                 ------------   ------   ------   --------
                                                                  (AMOUNTS IN MILLIONS)
<S>                                              <C>            <C>      <C>      <C>
Discovery......................................         50%     $  38    $ (32)   $  (293)
J-COM..........................................         45%        20      (22)       (90)
QVC............................................          *        107      154         36
UGC............................................         52%        --     (198)      (751)
Telewest Communications plc....................          *         --      (92)    (2,538)
Cablevision S.A................................         39%        --       --       (476)
ASTROLINK International LLC....................          *         --       (1)      (417)
Other..........................................    Various       (107)    (262)      (377)
                                                                -----    -----    -------
                                                                $  58    $(453)   $(4,906)
                                                                =====    =====    =======
</Table>

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

* No longer an equity affiliate

     At December 31, 2003, the aggregate carrying amount of our investments in
affiliates exceeded our proportionate share of our affiliates' net assets by
$7,021 million. Prior to the adoption of Statement 142, this excess basis was
being amortized over estimated useful lives of up to 20 years based on the
useful lives of the intangible assets represented by such excess costs. Such
amortization was $798 million for the year ended December 31, 2001, and is
included in our share of losses of affiliates. Upon adoption of Statement 142,
we discontinued amortizing equity method excess costs in existence at the
adoption date due to their characterization as equity method goodwill. Also
included in share of losses for the years ended December 31, 2003, 2002 and
2001, are adjustments for nontemporary declines in value aggregating $84
million, $148 million and $2,396 million, respectively. See "Operating Results
by Business Group" below for a discussion of our more significant equity method
affiliates.

     Nontemporary declines in fair value of investments.  During 2003, 2002 and
2001, we determined that certain of our cost investments experienced
other-than-temporary declines in value. As a result, the cost bases of such
investments were adjusted to their respective fair values based primarily on
quoted market prices at the balance sheet date. These adjustments are reflected
as nontemporary declines in fair value of investments in the consolidated
statements of operations. The following table identifies such adjustments
attributable to each of the individual investments as follows:

<Table>
<Caption>
                                                              YEARS ENDED DECEMBER 31,
                                                              -------------------------
INVESTMENTS                                                   2003     2002      2001
-----------                                                   -----   -------   -------
                                                                (AMOUNTS IN MILLIONS)
<S>                                                           <C>     <C>       <C>
Time Warner Inc.............................................   $--    $2,567    $2,052
News Corp...................................................    --     1,393       915
Sprint PCS..................................................    --     1,077        --
Vivendi.....................................................    --       409        --
Other.......................................................    29       607     1,134
                                                               ---    ------    ------
                                                               $29    $6,053    $4,101
                                                               ===    ======    ======
</Table>

                                       II-8
<PAGE>

     Gains (losses) on dispositions.  Aggregate gains (losses) from dispositions
during the years ended December 31, 2003, 2002 and 2001, are comprised of the
following.

<Table>
<Caption>
                                                              YEARS ENDED DECEMBER 31,
                                                              -------------------------
TRANSACTION                                                    2003      2002     2001
-----------                                                   -------   ------   ------
                                                                (AMOUNTS IN MILLIONS)
<S>                                                           <C>       <C>      <C>
Sale of investment in Cendant Corporation...................  $  510    $  --    $  --
Sale of investment in Vivendi...............................     262       --       --
Sale of News Corp. non-voting shares........................     236       --       --
UGC Transaction.............................................      --      123       --
Exchange of USAI equity securities for Vivendi common
  stock.....................................................      --     (817)      --
Sale of Telemundo Communications Group......................      --      344       --
Merger of Viacom and BET Holdings II, Inc...................      --       --      559
Exchange of our Gemstar-TV Guide International, Inc. common
  stock for News Corp. ADSs.................................      --       --     (965)
Other.......................................................     120      (65)      96
                                                              ------    -----    -----
                                                              $1,128    $(415)   $(310)
                                                              ======    =====    =====
</Table>

     In all of the above exchange transactions, the gains or losses were
calculated based upon the difference between the carrying value of the assets
relinquished, as determined on an average cost basis, compared to the fair value
of the assets received. See notes 5 and 6 to the accompanying consolidated
financial statements for a discussion of the foregoing transactions.

     Realized and unrealized gains (losses) on derivative instruments.  Realized
and unrealized gains (losses) on derivative instruments during the years ended
December 31, 2003, 2002 and 2001 are comprised of the following:

<Table>
<Caption>
                                                            YEARS ENDED DECEMBER 31,
                                                            -------------------------
                                                            2003     2002      2001
                                                            -----   -------   -------
                                                              (AMOUNTS IN MILLIONS)
<S>                                                         <C>     <C>       <C>
Change in fair value of exchangeable debenture call option
  features................................................  $(158)  $   784   $   167
Change in fair value of hedged AFS securities.............     --    (2,378)   (1,531)
Change in fair value of AFS derivatives...................   (535)    3,665     1,177
Change in fair value of other derivatives(1)..............     44        51        13
                                                            -----   -------   -------
  Total realized and unrealized gains (losses), net.......  $(649)  $ 2,122   $  (174)
                                                            =====   =======   =======
</Table>

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

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

     During 2001 and 2002, we had designated our equity collars as fair value
hedges. Pursuant to Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities," the equity
collars were recorded on the balance sheet at fair value, and changes in the
fair value of the equity collars and of the hedged security were recognized in
earnings. Effective December 31, 2002, we elected to dedesignate our equity
collars as fair value hedges. This election had no impact on our financial
position at December 31, 2002 or our results of operations for the year ended
December 31, 2002. Subsequent to December 31, 2002, changes in the fair value of
our available-for-sale securities that previously had been reported in earnings
due to the designation of equity collars as fair value hedges are now reported
as a component of other comprehensive income on our balance sheet. Changes in
the fair value of the equity collars continue to be reported in earnings.

     Income taxes.  Our effective tax rate was not meaningful in 2003 and was
33% and 36% for the years ended December 31, 2002 and 2001, respectively.
Although we had a loss before tax expense for book purposes in 2003, we recorded
tax expense of $374 million primarily due to our impairment of goodwill, which

                                       II-9
<PAGE>

is not deductible for tax purposes. In addition, we incurred state and foreign
taxes and an increase in our valuation allowance for losses of subsidiaries that
we do not consolidate for tax purposes. The effective tax rates in 2002 and 2001
differed from the U.S. Federal income tax rate of 35% primarily due to state and
local taxes and amortization for book purposes that is not deductible for income
tax purposes.

     Cumulative effect of accounting change.  We and our subsidiaries adopted
Statement 142 effective January 1, 2002. Upon adoption, we determined that the
carrying value of certain of our reporting units (including allocated goodwill)
was not recoverable. Accordingly, in the first quarter of 2002, we recorded an
impairment loss of $1,869 million, net of related taxes, as the cumulative
effect of a change in accounting principle. This transitional impairment loss
includes an adjustment of $325 million for our proportionate share of transition
adjustments that our equity method affiliates have recorded.

     Effective January 1, 2001, we adopted Statement 133, which established
accounting and reporting standards for derivative instruments. All derivatives,
whether designated in hedging relationships or not, are required to be recorded
on the balance sheet at fair value. If the derivative is designated as a fair
value hedge, the changes in the fair value of the derivative and of the hedged
item attributable to the hedged risk are recognized in earnings. If the
derivative is not designated as a hedge, changes in the fair value of the
derivative are recognized in earnings.

     The adoption of Statement 133 on January 1, 2001, resulted in a cumulative
increase in net earnings of $545 million (after tax expense of $356 million) and
an increase in other comprehensive loss of $87 million. The increase in net
earnings was mostly attributable to separately recording the fair value of our
embedded call option obligations associated with our senior exchangeable
debentures. The increase in other comprehensive loss relates primarily to
changes in the fair value of our warrants and options to purchase certain
available-for-sale securities.

  OPERATING RESULTS BY BUSINESS GROUP

     The tables in this section present 100% of each business' revenue,
operating cash flow and operating income even though we own less than 100% of
many of these businesses. These amounts are combined on an unconsolidated basis
and are then adjusted to remove the effects of the equity method investments to
arrive at the consolidated amounts for each group. This presentation is designed
to reflect the manner in which management reviews the operating performance of
individual businesses within each group regardless of whether the investment is
accounted for as a consolidated subsidiary or an equity investment. It should be
noted, however, that this presentation is not in accordance with GAAP since the
results of operations of equity method investments are required to be reported
on a 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.

                                      II-10
<PAGE>

     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. As a
result, we make no representations as to whether such information has been
prepared in accordance with GAAP. 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

<Table>
<Caption>
                                                           YEARS ENDED DECEMBER 31,
                                                          ---------------------------
                                                           2003      2002      2001
                                                          -------   -------   -------
                                                             (AMOUNTS IN MILLIONS)
<S>                                                       <C>       <C>       <C>
REVENUE
QVC(1)..................................................  $ 4,889   $ 4,362   $ 3,894
Ascent Media............................................      508       538       593
Other consolidated subsidiaries.........................      317       256       239
Other equity method affiliates..........................       88       138        --
                                                          -------   -------   -------
  Combined Interactive Group revenue....................    5,802     5,294     4,726
Eliminate revenue of equity method affiliates(1)........   (3,004)   (4,500)   (3,894)
                                                          -------   -------   -------
  Consolidated Interactive Group revenue................  $ 2,798   $   794   $   832
                                                          =======   =======   =======
OPERATING CASH FLOW
QVC(1)..................................................  $ 1,013   $   861   $   722
Ascent Media............................................       75        87        89
Other consolidated subsidiaries.........................      (13)      (26)      (13)
Other equity method affiliates..........................      (20)      (91)       --
                                                          -------   -------   -------
  Combined Interactive Group operating cash flow........    1,055       831       798
Eliminate operating cash flow of equity method
  affiliates(1).........................................     (559)     (770)     (722)
                                                          -------   -------   -------
  Consolidated Interactive Group operating cash flow....  $   496   $    61   $    76
                                                          =======   =======   =======
OPERATING INCOME (LOSS)
QVC(1)..................................................  $   785   $   737   $   582
Ascent Media............................................        1       (65)     (363)
Other consolidated subsidiaries.........................     (154)     (274)     (165)
Other equity method affiliates..........................      (50)     (258)       --
                                                          -------   -------   -------
  Combined Interactive Group operating income...........      582       140        54
Eliminate operating income of equity method
  affiliates(1).........................................     (443)     (479)     (582)
                                                          -------   -------   -------
  Consolidated Interactive Group operating income
     (loss).............................................  $   139   $  (339)  $  (528)
                                                          =======   =======   =======
</Table>

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

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

     QVC.  QVC is a retailer of a wide range of consumer products, which are
marketed and sold primarily by merchandise-focused televised shopping programs.
In the United States, the programs are aired through its nationally televised
shopping network -- 24 hours a day, 7 days a week ("QVC-US"). Internationally,
QVC has electronic retailing program services based in the United Kingdom
("QVC-England"), Germany ("QVC-Deutschland") and Japan ("QVC-Japan"). As more
fully described in note 4 to the accompanying 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

                                      II-11
<PAGE>

consolidated QVC's results of operations since that date. Accordingly, increases
in the Interactive Group's revenue and expenses for the year ended December 31,
2003 are primarily the result of the September 2003 acquisition of QVC.

     The following discussion describes QVC's results of operations for the full
years ended December 31, 2003, 2002 and 2001. Depreciation and amortization for
periods prior and subsequent to Liberty's acquisition of Comcast's interest in
QVC are not comparable as a result of the effects of purchase accounting.
However, in order to provide a more meaningful basis for comparing the 2003,
2002 and 2001 periods, the operating results of QVC for the four months ended
December 31, 2003 have been combined with the eight months ended August 31, 2003
in the following table and discussion. The combining of predecessor and
successor accounting periods is not permitted by GAAP.

<Table>
<Caption>
                                                           YEARS ENDED DECEMBER 31,
                                                          ---------------------------
                                                           2003      2002      2001
                                                          -------   -------   -------
                                                             (AMOUNTS IN MILLIONS)
<S>                                                       <C>       <C>       <C>
Net revenue.............................................  $ 4,889   $ 4,362   $ 3,894
Cost of sales...........................................   (3,107)   (2,784)   (2,503)
                                                          -------   -------   -------
  Gross profit..........................................    1,782     1,578     1,391
Operating expenses......................................     (447)     (413)     (383)
SG&A expenses...........................................     (322)     (304)     (286)
Stock compensation......................................       (6)       (5)       (2)
Depreciation and amortization...........................     (222)     (119)     (138)
                                                          -------   -------   -------
  Operating income......................................  $   785   $   737   $   582
                                                          =======   =======   =======
</Table>

     Net revenue for the years ended December 31, 2003, 2002 and 2001 includes
the following revenue by geographical area:

<Table>
<Caption>
                                                             YEARS ENDED DECEMBER 31,
                                                             ------------------------
                                                              2003     2002     2001
                                                             ------   ------   ------
                                                              (AMOUNTS IN MILLIONS)
<S>                                                          <C>      <C>      <C>
QVC-US.....................................................  $3,845   $3,705   $3,409
QVC-England................................................     370      296      272
QVC-Deutschland............................................     429      275      198
QVC-Japan..................................................     245       86       15
                                                             ------   ------   ------
Consolidated...............................................  $4,889   $4,362   $3,894
                                                             ======   ======   ======
</Table>

     QVC's consolidated net revenue increased 12.1% during the year ended
December 31, 2003 as compared to the year ended December 31, 2002. Such increase
is due primarily to increases in average sales per customer for both
QVC-Deutschland and QVC-Japan of 48.4% and 73.0%, respectively. In addition, the
number of homes receiving the QVC-Deutschland and QVC-Japan service increased
5.6% and 64.6%, respectively, from December 31, 2002 to December 31, 2003.
Additional increases in net revenue were due to a 2.8% and a 6.3% increase in
net sales per customer in the U.S. and the U.K., respectively. QVC's net revenue
increased 12.0% for the year ended December 31, 2002, as compared to 2001. Such
increase was due to a 3.6% increase in the average number of U.S. homes
receiving the QVC service and a 5.3% increase in net sales to existing U.S.
subscribers. Additional increases in net revenues were due to a 252.7% and 29.1%
increase in net sales per customer for QVC-Japan and QVC-Deutschland,
respectively. As the QVC service is already received by substantially all of the
cable television and direct broadcast satellite homes in the U.S., future growth
in U.S. sales will depend on continued additions of new customers from homes
already receiving the QVC service and continued growth in sales to existing
customers. QVC's future sales may also be affected by the willingness of cable
and satellite distributors to continue to carry QVC's programming service as
well as general economic conditions.

                                      II-12
<PAGE>

     During the years ended December 31, 2003, 2002 and 2001 the increases in
revenue 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:

<Table>
<Caption>
                                                 PERCENTAGE INCREASE IN NET REVENUE
                                      ---------------------------------------------------------
                                              YEAR ENDED                    YEAR ENDED
                                           DECEMBER 31, 2003             DECEMBER 31, 2002
                                      ---------------------------   ---------------------------
                                      US DOLLARS   LOCAL CURRENCY   US DOLLARS   LOCAL CURRENCY
                                      ----------   --------------   ----------   --------------
<S>                                   <C>          <C>              <C>          <C>
QVC-US..............................      3.8%                          8.7%
QVC-England.........................     25.0%          14.2%           8.8%           5.8%
QVC-Deutschland.....................     56.0%          31.0%          38.9%          31.6%
QVC-Japan...........................    184.9%         170.2%         473.3%         485.1%
</Table>

     Gross profit increased from 35.7% of net revenue for the year ended
December 31, 2001 to 36.2% for the year ended December 31, 2002 and to 36.4% for
2003. The 2003 increase in gross profit percentage is primarily the result of a
higher product margin due to a shift in the product mix from lower margin home
products to higher margin apparel and accessory categories. In addition, QVC had
a lower inventory obsolescence provision in 2003. The increase in the 2002 gross
profit percentage is primarily the result of increased product margin.

     QVC's operating expenses are comprised of commissions and license fees,
order processing and customer service, provision for doubtful accounts, and
credit card processing fees. Operating expenses increased 8.2% and 7.8% for the
years ended December 31, 2003 and 2002, respectively, as compared to the
corresponding prior year period. These increases are primarily due to the
increases in sales volume. As a percentage of net revenue, operating expenses
were 9.1%, 9.5% and 9.8% for 2003, 2002 and 2001, respectively. As a percent of
net revenue, commissions and license fees decreased in 2003, as compared to
2002, and remained constant over the 2002 and 2001 periods. The 2003 decrease is
due to an increase in Internet sales, for which lower commissions are required
to be paid. In addition, commissions and license fee expense decreased as a
percentage of net revenue in 2003 for QVC-Japan where certain distributors
receive payments based on number of subscribers rather than sales volume. As a
percent of net revenue, order processing and customer service expenses remained
constant in 2003 and decreased in each geographical segment in 2002. Such
decrease is a result of reduced personnel expense due to increased Internet
sales, increased use of QVC's automated telephone system and operator
efficiencies in call handling and staffing. Credit card processing fees remained
constant at 1.4% of net revenue for the years ended December 31, 2003, 2002 and
2001.

     QVC's SG&A expenses increased 5.9% and 6.3% during the years ended December
31, 2003 and 2002, respectively, as compared to the corresponding prior year
periods. The 2003 increase is primarily the net result of increases in
personnel, transponder and occupancy costs, partially offset by decreases in
advertising and marketing costs. Personnel cost increases reflect the addition
of personnel to support the increased sales of the foreign operations. The
increase in transponder fees is primarily the result of QVC-UK purchasing
greater band-width as well as incurring a full year of digital transmission
fees. Occupancy costs increased primarily as the result of higher costs for
expanded office space in QVC-Japan. Decreases in advertising and marketing were
primarily due to decreased domestic spending related to U.S. infomercial
ventures as well as lower payments to affiliates for short-term carriage and
incentive programs. The increase in SG&A in 2002 is due primarily to higher
personnel costs due to the expansion of the international businesses.

     QVC's depreciation and amortization expense increased for the year ended
December 31, 2003 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 decreased 5.6% and 9.3% during the years ended
December 31, 2003 and 2002, respectively, as compared to the corresponding prior
year. The 2003 decrease is due primarily to a decrease in

                                      II-13
<PAGE>

revenue for Ascent Media's Networks Group ($29 million) due to the sale of a
business unit in December 2002 and the re-negotiation of certain contracts
resulting in lower rates for services. The 2002 decrease is the net effect of
decreases due to reduced television and motion picture production activity and
lower television advertising production, which were partially offset by an
increase due to acquisitions in the second half of 2001.

     Ascent Media's operating expenses decreased $21 million or 6.5% and $48
million or 13.0% during the years ended December 31, 2003 and 2002,
respectively, as compared to the corresponding prior year. These decreases are
due to decreases in variable expenses such as personnel and material costs. In
addition, the 2003 decrease is due to the sale of the Networks Group business
unit referred to above.

     Ascent Media's general and administrative expenses were relatively
comparable over the 2001, 2002 and 2003 periods.

     Ascent Media's depreciation and amortization increased 4.8% and decreased
47.7% in 2003 and 2002, respectively. The decrease in depreciation and
amortization in 2002 is due primarily to the adoption of Statement 142 and the
resulting elimination of goodwill amortization.

     In connection with its 2002 Statement 142 impairment analysis, Ascent Media
recorded an $84 million charge to write off a portion of the goodwill related to
its Entertainment Television reporting unit. As a result of the weakness in the
economy and in the entertainment and advertising industries during 2001, Ascent
Media did not meet its 2001 operating objectives and reduced its 2002
expectations. Accordingly, at December 31, 2001, Ascent Media assessed the
recoverability of its property and equipment and intangible assets and
determined that an impairment adjustment was necessary. In addition, in the
fourth quarter of 2001, Ascent Media made the decision to consolidate its
operations and close certain facilities. In connection with these initiatives,
Ascent Media recorded a restructuring charge related to lease cancellation fees
and an additional impairment charge related to its property and equipment. All
of the foregoing charges are included in impairment of long-lived assets in our
statement of operations for the year ended December 31, 2001. No significant
impairments were recorded by Ascent Media in 2003.

     Other.  Consolidated subsidiaries included in the Interactive Group are On
Command, which provides in-room, on demand video entertainment and information
services to hotels, motels and resorts; TruePosition, Inc., which provides
equipment and technology that deliver location-based services to wireless users;
and OpenTV, which provides interactive television solutions, including operating
middleware, web browser software, interactive applications, and consulting and
support services. Other consolidated subsidiary revenue increased $61 million in
2003 due primarily to the operations of OpenTV ($46 million), which we acquired
in August 2002 and True Position ($20 million), which began deploying its
networks in 2003. The improvements in operating cash flow and operating income
in 2003 are due to the same factors. The increase in other consolidated
subsidiary revenue in 2002 is due to our acquisition of OpenTV. The changes in
operating cash flow and operating income in 2002 are due to improvements in the
operations of On Command and True Position, offset by OpenTV losses.

                                      II-14
<PAGE>

  International Group

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

<Table>
<Caption>
                                                           YEARS ENDED DECEMBER 31,
                                                          ---------------------------
                                                           2003      2002      2001
                                                          -------   -------   -------
                                                             (AMOUNTS IN MILLIONS)
<S>                                                       <C>       <C>       <C>
REVENUE
Consolidated subsidiaries...............................  $   107   $   100   $   138
UGC(1)..................................................    1,892     1,515     1,562
J-COM(1)................................................    1,233       931       629
JPC(1)..................................................      412       274       207
Other equity method affiliates(1).......................      614       568       854
                                                          -------   -------   -------
  Combined International Group revenue..................    4,258     3,388     3,390
Eliminate revenue of equity method affiliates...........   (4,151)   (3,288)   (3,252)
                                                          -------   -------   -------
  Consolidated International Group revenue..............  $   107   $   100   $   138
                                                          =======   =======   =======
OPERATING CASH FLOW
Consolidated subsidiaries...............................  $    27   $    26   $    42
UGC(1)..................................................      629       296      (191)
J-COM(1)................................................      429       211        57
JPC(1)..................................................       54        32        19
Other equity method affiliates(1).......................       91        87        61
                                                          -------   -------   -------
  Combined International Group operating cash flow......    1,230       652       (12)
Eliminate operating cash flow of equity method
  affiliates............................................   (1,203)     (626)       54
                                                          -------   -------   -------
  Consolidated International Group operating cash
     flow...............................................  $    27   $    26   $    42
                                                          =======   =======   =======
OPERATING INCOME (LOSS)
Consolidated subsidiaries...............................  $    12   $    11   $   (36)
UGC(1)..................................................     (656)     (899)   (2,872)
J-COM(1)................................................      114       (29)     (195)
JPC(1)..................................................       44        23        12
Other equity method affiliates(1).......................      (36)     (296)      (88)
                                                          -------   -------   -------
  Combined International Group operating loss...........     (522)   (1,190)   (3,179)
Eliminate operating income of equity method
  affiliates............................................      534     1,201     3,143
                                                          -------   -------   -------
  Consolidated International Group operating income
     (loss).............................................  $    12   $    11   $   (36)
                                                          =======   =======   =======
</Table>

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

(1) Represents an equity method affiliate. Equity ownership percentages for
    significant equity affiliates at December 31, 2003 are as follows:

<Table>
<S>                                                           <C>
UGC.........................................................   52%
J-COM.......................................................   45%
JPC.........................................................   50%
</Table>

     Consolidated Subsidiaries.  Our international consolidated subsidiaries are
Liberty Cablevision of Puerto Rico, Inc., which provides cable television and
other broadband services in Puerto Rico, and Pramer, which owns and distributes
programming services throughout Latin America. Consolidated International Group
revenue, operating cash flow and operating income was relatively consistent from
2002 to 2003. The decrease

                                      II-15
<PAGE>

in revenue and operating cash flow from 2001 to 2002 is due to the devaluation
of the Argentine peso during 2002.

     UGC.  UGC's revenue increased 24.9% and decreased 3.0% for the years ended
December 31, 2003 and 2002, respectively. The increase in 2003 is due primarily
to an increase in subscribers, revenue per subscriber and the strengthening of
the euro against the U.S. dollar (approximately 16.1%). The decrease in 2002 is
due to the sale of UGC's Australian operations partially offset by increases in
Europe and Chile. UGC's operating expenses decreased $4 million or less than 1%
in 2003 and $290 million or 27.3% in 2002. These decreases are due primarily to
cost control initiatives, including restructurings. The 2002 expenses were also
impacted by the sale of UGC's Australian operations. UGC's SG&A expenses
increased $48 million or 10.7% in 2003 and decreased $244 million or 35.4% in
2002. The 2003 increase is due primarily to the strengthening of the euro
against the U.S. dollar. The 2002 decrease is the result of cost control
initiatives and the sale of UGC's Australian operations.

     Also included in UGC's operating losses are (i) impairments of long-lived
assets of $1,321 million in 2001, compared to $436 million in 2002 and $402
million in 2003, and (ii) restructuring charges of $204 million in 2001,
compared to $1 million in 2002 and $36 million in 2003.

     J-COM.  J-COM's revenue increased 32.5% and 48.0% for the years ended
December 31, 2003 and 2002, respectively, as compared to the corresponding prior
year. The increase in revenue in 2003 was due to a 10.3% increase in the number
of homes receiving at least one service, a 8.4% increase in the average number
of services per home and a 9.6% increase in the average revenue per household
receiving at least one service ("ARPH"). Revenue increased in 2002 due to a
23.2% increase in homes receiving at least one service, a 11.7% increase in
average number of services per home and a 9.2% increase in ARPH. In addition,
changes in the exchange rate also positively impacted revenue in 2003 and 2002.
On a local currency basis, J-COM's revenue increased 22.7% and 52.3% in 2003 and
2002, respectively.

     J-COM's operating expenses increased 17.0% and 22.2% in 2003 and 2002,
respectively. These increases are due to the increase in subscribers and growth
of J-COM's business. As a percent of revenue, operating expenses decreased from
40.3% in 2002 to 35.5% in 2003 due to the realization of economies of scale from
the growth of the business. SG&A expenses increased 6.2% and 30.1% in 2003 and
2002, respectively. The increase in SG&A expenses are due to the growth of the
business in 2002 and exchange rate fluctuations in 2003.

     JPC.  JPC's revenue increased 50.4% and 32.2% for the years ended December
31, 2003 and 2002, respectively, as compared to the corresponding prior years.
The increase in 2003 was largely due to increases in revenue for Shop Channel,
which experienced an 17.5% increase in full time equivalent homes ("FTE's") and
a 14% increase in sales per FTE. In 2002, Shop Channel had a 30.4% increase in
FTE's and a 8.2% increase in sales per FTE. Affiliate revenue and advertising
revenue at JPC's other networks also contributed to the overall revenue increase
in both years due to continued subscriber growth at those networks. Shop Channel
revenue accounted for 81%, 80% and 78% of JPC's revenue in 2003, 2002 and 2001,
respectively. In addition, changes in the exchange rate also positively impacted
revenue in 2003 and 2002. On a local currency basis, JPC's revenue increased
39.4% and 36.1% in 2003 and 2002, respectively.

     JPC's operating expenses increased 50.5% and 43.0% in 2003 and 2002,
respectively. These increases are primarily due to higher cost of goods sold at
Shop Channel resulting from revenue increases of 41.3% and 38.9% during 2003 and
2002, respectively. JPC's SG&A expenses increased 29.8% and 25.1% in 2003 and
2002, respectively. The increases in SG&A were due to growth in the business
resulting from additional sales volume at Shop Channel and additional channel
offerings.

     Other Equity Method Affiliates.  The decreases in revenue, operating cash
flow and operating income in 2002 are due primarily to the devaluation of the
Argentine peso and the resulting impact on the financial results of Cablevision
S.A., which provides broadband services in Argentina.

                                      II-16
<PAGE>

  Networks Group

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

<Table>
<Caption>
                                                           YEARS ENDED DECEMBER 31,
                                                          ---------------------------
                                                           2003      2002      2001
                                                          -------   -------   -------
                                                             (AMOUNTS IN MILLIONS)
<S>                                                       <C>       <C>       <C>
REVENUE
Starz Encore............................................  $   906   $   945   $   863
Discovery(1)............................................    1,995     1,717     1,517
Court TV(1).............................................      193       148       118
GSN(1)..................................................       76        53        37
Other consolidated subsidiaries.........................      208       200       167
                                                          -------   -------   -------
  Combined Networks Group revenue.......................    3,378     3,063     2,702
Eliminate revenue of equity method affiliates...........   (2,264)   (1,918)   (1,672)
                                                          -------   -------   -------
  Consolidated Networks Group revenue...................  $ 1,114   $ 1,145   $ 1,030
                                                          =======   =======   =======
OPERATING CASH FLOW
Starz Encore............................................  $   368   $   371   $   313
Discovery(1)............................................      508       379       286
Court TV(1).............................................       44        (1)       (3)
GSN(1)..................................................        1       (11)      (17)
Other consolidated subsidiaries.........................       13         3        14
                                                          -------   -------   -------
  Combined Networks Group operating cash flow...........      934       741       593
Eliminate operating cash flow of equity method
  affiliates............................................     (553)     (367)     (266)
                                                          -------   -------   -------
  Consolidated Networks Group operating cash flow.......  $   381   $   374   $   327
                                                          =======   =======   =======
OPERATING INCOME (LOSS)
Starz Encore............................................  $   266   $   297   $    68
Discovery(1)............................................      314       169        69
Court TV(1).............................................       14       (18)      (13)
GSN(1)..................................................       (1)      (12)      (17)
Other consolidated subsidiaries.........................      (18)     (108)      (19)
                                                          -------   -------   -------
  Combined Networks Group operating income..............      575       328        88
Eliminate operating income of equity method
  affiliates............................................     (327)     (139)      (39)
                                                          -------   -------   -------
  Consolidated Networks Group operating income..........  $   248   $   189   $    49
                                                          =======   =======   =======
</Table>

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

(1) Represents an equity method affiliate. Equity ownership percentages for
    significant equity affiliates at December 31, 2003 are as follows:

<Table>
<S>                                                           <C>
Discovery...................................................   50%
Court TV....................................................   50%
GSN.........................................................   50%
</Table>

     Starz Encore.  Starz Encore provides premium programming distributed by
cable operators, direct-to-home satellite providers and other distributors
throughout the United States. The majority of Starz Encore's revenue is derived
from the delivery of movies to subscribers under affiliation agreements with
these video programming distributors. Prior to 2001, Starz Encore had entered
into an affiliation agreement with AT&T Broadband LLC (previously known as
Tele-Communications, Inc.), which provided for AT&T Broadband's

                                      II-17
<PAGE>

unlimited access to all of the existing Encore and STARZ! services in exchange
for fixed monthly payments to Starz Encore (the "1997 Affiliation Agreement").
The payment from AT&T Broadband was to be adjusted if AT&T acquired or disposed
of cable systems, or if Starz Encore's cash programming costs increased or
decreased, as the case may be, above or below amounts specified in the
agreement. In such cases, AT&T Broadband's payments under the 1997 Affiliation
Agreement would have been increased or decreased in an amount equal to a
proportion of the excess or shortfall.

     In November 2002, AT&T Broadband completed a transaction with Comcast
Corporation and Comcast Holdings Corporation in which AT&T Broadband and Comcast
Holdings became wholly-owned subsidiaries of Comcast, and AT&T Broadband was
renamed Comcast Cable Holdings, LLC. Upon completion of this transaction,
Comcast challenged the validity and enforceability of the 1997 Affiliation
Agreement. In September 2003, Starz Encore and Comcast entered into a seven-year
agreement (the "2003 Comcast Affiliation Agreement") for the carriage of the
STARZ! and Encore movie services on all Comcast owned and operated cable systems
(including those of Comcast Cable Holdings). This agreement resolved all of the
disputes and litigation that were pending between Starz Encore and Comcast with
respect to the 1997 Affiliation Agreement.

     Pursuant to the terms of the 2003 Comcast Affiliation Agreement, Comcast
made payments to Starz Encore for Comcast Cable Holdings subscribers for the
period from November 2002 to December 31, 2003 based on the per-subscriber rates
included in the Comcast consignment agreement that was in effect prior to the
execution of the 2003 Comcast Affiliation Agreement. The 2003 Comcast
Affiliation Agreement also includes provisions for the distribution of new Starz
Encore products in select Comcast systems and provisions for co-operative
marketing efforts between Comcast and Starz Encore. Unlike the 1997 Affiliation
Agreement, the 2003 Comcast Affiliation Agreement does not include any provision
permitting Starz Encore to pass through a portion of its programming costs.

     Starz Encore's revenue decreased 4.1% and increased 9.5% for the years
ended December 31, 2003 and 2002, respectively, as compared to the corresponding
prior years. The 2003 decrease is primarily the net effect of a $77 million
reduction in revenue from Comcast Cable Holdings partially offset by a $35
million increase in revenue from other distributors resulting from a 13.6%
increase in the number of average subscription units to Starz Encore's services.
Substantially all of the increase in the average number of subscription units is
attributable to Starz Encore's Thematic Multiplex service, which has lower
subscription rates than the other Starz Encore services. The reduction in
revenue from Comcast Cable Holdings is the result of a lower effective
per-subscriber fee under the Comcast consignment agreement and a decrease in
STARZ! subscription units in the Comcast Cable Holdings system partially offset
by an increase in subscription units to Starz Encore's other services. The
decrease in STARZ! subscription units in these systems is due to the negative
effects of changes in marketing efforts and packaging of STARZ! that Comcast
implemented prior to the execution of the 2003 Comcast Affiliation Agreement.
Comcast, DirecTV and Echostar Communications generated 24.2%, 23.3% and 11.0%,
respectively, of Starz Encore's revenue for the year ended December 31, 2003.
The 2002 increase in revenue is primarily due to a 24.7% increase in average
subscription units from all forms of distribution. Subscription units grew at a
faster rate than revenue primarily due to a disproportionate increase in units
of Thematic Multiplex channels.

     Starz Encore's average subscription units increased at a slower rate in
2003 as compared to 2002. This trend reflects the impact of the dispute with
Comcast described above, as well as the impact of promotional efforts on the
part of certain other DTH and cable operators to sell other premium movie
services to their customers instead of Starz Encore's offerings. During the
third and fourth quarters of 2003, Starz Encore entered into new affiliation
agreements with certain multichannel video program distributors, including
Comcast and Charter Communications. Under these new affiliation agreements,
Starz Encore has obtained more favorable positioning and increased co-operative
marketing commitments. Starz Encore is negotiating with its other multichannel
video programming distributors to obtain similar positioning and increased co-
operative marketing commitments. However, no assurance can be given that these
negotiations will be successful.

                                      II-18
<PAGE>

     Starz Encore's subscription units at December 31, 2003, 2002 and 2001 are
presented in the table below. Subscription units for December 31, 2002 reflect
certain minor adjustments to conform with the policy adopted by Starz Encore in
2003 of only presenting paying subscription units. Prior to 2003, Starz Encore
had included certain of its subscribers receiving the services during free
promotional campaigns.

<Table>
<Caption>
                                                                SUBSCRIPTIONS AT
                                                                  DECEMBER 31,
                                                              ---------------------
SERVICE OFFERING                                              2003    2002    2001
----------------                                              -----   -----   -----
                                                                  (IN MILLIONS)
<S>                                                           <C>     <C>     <C>
Thematic Multiplex..........................................  111.4    96.8    76.0
Encore......................................................   21.9    20.9    18.6
Starz!......................................................   12.3    13.2    13.0
Movieplex...................................................    5.4     5.0     6.5
                                                              -----   -----   -----
                                                              151.0   135.9   114.1
                                                              =====   =====   =====
</Table>

     At December 31, 2003, cable, direct broadcast satellite, and other
distribution represented 65.5%, 33.7% and 0.8%, respectively, of Starz Encore's
total subscription units.

     Starz Encore's operating expenses increased $22 million or 5.4% and $5
million or 1.2% for the years ended December 31, 2003 and 2002, respectively, as
compared to the corresponding prior year. Such increases are due primarily to
increases in programming costs, which increased from $358 million in 2002 to
$398 million in 2003. In the first quarter of 2003, Starz Encore entered into a
settlement agreement regarding the payment of certain music license fees, which
resulted in the reversal of a related accrual in the amount of $8 million. This
reversal partially offset the programming cost increase in 2003. In 2002, Starz
Encore's uplink costs decreased $5 million as a result of the completion of
Starz Encore's new uplink facility. This decrease partially offset the increase
in programming costs.

     Starz Encore estimates that its 2004 programming expense will increase
between $170 million and $190 million over amounts expensed in 2003. In
addition, Starz Encore expects that programming costs in 2005 will exceed the
2004 costs by approximately $125 million to $175 million. Such increases are
based on increases in the expected box office performance of movie titles that
will become available to Starz Encore during these periods through its output
arrangements with various movie studios. In addition, Starz Encore expects a
higher cost per title due to a new rate card for movie titles under certain of
its license agreements that will be effective for movies made available to Starz
Encore in 2004 and thereafter and amortization of deposits previously made under
the output agreements. The portion of increased programming costs that would
otherwise have been eligible to be passed through under the 1997 Affiliation
Agreement cannot be passed through under the 2003 Comcast Affiliation Agreement.
In 2004, Starz Encore is not expected to generate increases in revenue or
reductions in other costs in 2004 sufficient to fully offset these cost
increases. Accordingly, these increased programming costs are expected to result
in a direct reduction to Starz Encore's operating income in 2004. These
estimates are subject to a number of assumptions that could change depending on
the number of movie titles actually becoming available to Starz Encore and their
ultimate box office performance. Accordingly, the actual amount of cost
increases experienced by Starz Encore may differ from the amounts noted above.

     Starz Encore's selling, general and administrative expenses decreased $58
million or 35.0% and increased $19 million or 12.7% during 2003 and 2002,
respectively, as compared to the corresponding prior year. The decrease in 2003
is due primarily to a $57 million decrease in sales and marketing expenses and a
$7 million decrease in bad debt expense. The decrease in sales and marketing
expenses is due to the reduced number of co-operative promotions by certain
multichannel television distributors discussed above and the reversal of an
accrual recorded in prior years. As noted above, during the third and fourth
quarters of 2003, Starz Encore entered into new affiliation agreements with
certain multichannel television distributors, including Comcast and Charter
Communications. Consequently, Starz Encore anticipates that its co-operative
promotions and its sales and marketing expenses will increase in 2004. The
higher bad debt expense in 2002 resulted from the

                                      II-19
<PAGE>

bankruptcy filing of Adelphia Communications Corporation. The increase in SG&A
expenses in 2002 is due primarily to increases in marketing support, salaries
and related payroll expenses, and bad debt expense.

     The decrease in Starz Encore's depreciation and amortization in 2002 is due
to the adoption of Statement 142 and the resulting elimination of goodwill
amortization.

     Starz Encore has granted phantom stock appreciation rights to certain of
its officers and employees. Compensation relating to the phantom stock
appreciation rights has been recorded based upon the fair value of Starz Encore
as determined by a third-party appraisal. The amount of expense associated with
the phantom stock appreciation rights is generally based on the vesting of such
rights and the change in the fair value of Starz Encore. Starz Encore's stock
compensation decreased in 2003 as a result of a decrease in the estimated equity
value of Starz Encore.

     As more fully described above under "-- Consolidated Operating
Results -- Impairment of Long-lived Assets," we recorded a $1,352 million
impairment charge in 2003 related to Starz Encore, of which $1,195 million
relates to enterprise-level goodwill and is included in Corporate and Other.

     Discovery.  Discovery's revenue increased 16.2% and 13.2% for the years
ended December 31, 2003 and 2002, respectively, as compared to the corresponding
prior year. The 2003 revenue increase was driven by a 22.8% increase in gross
advertising revenue and a 11.9% increase in gross affiliate revenue. The
increase in advertising revenue in 2003 was primarily due to increased audience
delivery in the United States and Europe due to improved ratings and an increase
in overall subscribers. Affiliate revenue increased due to the overall
subscriber growth combined with subscribers moving from free preview status to
paying subscribers at the developing domestic networks. The revenue increase in
2002 was due to a 10.9% increase in gross advertising revenue and a 14.0%
increase in gross affiliate revenue. The growth in advertising revenue was
caused by an increase in audience delivery both domestically and in Europe
combined with an increase in the percentage of advertising spots that were sold.
Affiliate revenue grew due to the conversion of free preview subscribers to
paying subscribers at various developing networks.

     Discovery's operating expenses increased 7.4% and 13.1% in 2003 and 2002,
respectively. Such increases were due primarily to 11.9% and 18.5% increases in
programming costs, respectively, as the company continues to invest in newer and
more dramatic programming. Discovery's SG&A expenses increased 15.1% and 4.3% in
2003 and 2002, respectively. The increase in 2003 was primarily driven by
increased personnel and general and administrative expense domestically,
combined with increased marketing and sales related expenses. The 2002 increase
was due to growth in personnel and administrative expenses combined with higher
domestic sales related expenses.

     Court TV.  Court TV's revenue increased 30.4% and 25.4% for the years ended
December 31, 2003 and 2002, respectively, as compared to the corresponding prior
year. The 2003 increase is due to a 26.8% increase in affiliate revenue and a
45.4% increase in advertising revenue. Advertising revenue increased as a result
of a 13.0% increase in primetime ratings combined with a 7.5% increase in
subscribers, which also drove the increase in affiliate revenue. The revenue
increase in 2002 was due to a 3.7% and 44.2% increase in affiliate and
advertising revenue, respectively. The increase in advertising revenue was
mainly due to a 6.3% increase in subscribers and a 16.7% increase in primetime
ratings.

     Court TV's operating expenses, which are comprised primarily of programming
costs, decreased 11.8% in 2003 and increased 32.9% in 2002. The increase in
operating costs in 2002 was due to increased programming investments. Operating
costs decreased in 2003 due to a reduction in various acquired programming costs
combined with a delay in the release of certain original programming. Court TV's
SG&A expenses increased 11.0% and 15.6% in 2003 and 2002, respectively. The
increases in Court TV's expenses are due to the growth of the business. As a
percent of revenue, SG&A expenses decreased from 49.9% in 2002 to 42.5% in 2003
as the company's size is creating more economies of scale.

     GSN.  GSN's revenue increased 43.4% and 43.2% for the years ended December
31, 2003 and 2002, respectively, as compared to the corresponding prior year.
These increases are due to 30.8% and 30.8% increases in advertising revenue and
60.7% and 71.9% increases in net affiliate revenue. Affiliate revenue increased
in both years due to 13.2% and 25.8% growth in subscribers combined with modest
rate increases
                                      II-20
<PAGE>

and a decrease in amortized subscriber launch costs. Advertising revenue
increased due to an improved audience delivery, stemming from subscriber growth
and improved delivery of key demographics, as well as improved sales efforts
yielding an increased percentage of inventory sold to advertisers.

     GSN's operating expenses, which are comprised primarily of programming
costs, increased 46.7% and 14.8% in 2003 and 2002, respectively, and represented
46.6% and 45.0% of revenue. The increase in operating costs in both years is due
to continued investments in programming and interactive functionality. GSN's
SG&A expenses decreased 1.1% in 2003 and increased 57.5% in 2002, as compared to
the corresponding prior year. As a percent of revenue, SG&A expenses decreased
from 75.4% in 2002 to 52.6% in 2003. The increase in SG&A in 2002 was due
primarily to increased marketing costs associated with branding the business
combined with an increase in general and administrative costs related to the
growth in the business.

     Other.  Included in the Networks Group consolidated subsidiaries is Maxide
Acquisition, Inc. (d/b/a DMX Music), which is principally engaged in
programming, distributing, and marketing digital and analog music services to
homes and businesses. Operating results for our other Networks consolidated
subsidiaries were fairly consistent during the three years presented. The higher
operating loss in 2002 is due primarily to a $44 million impairment of
long-lived assets related to DMX Music.

LIQUIDITY AND CAPITAL RESOURCES

  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 future cash
requirements and planned commitments. During 2003, we issued $1,750 million
principal amount of 0.75% Senior Exchangeable Debentures due 2023. Each $1,000
debenture is exchangeable at the holder's option for the value of 57.4079 shares
of Time Warner common stock. We received cash proceeds of $1,715 million upon
issuance of the exchangeable debentures after related offering costs. In
addition, during 2003 we (i) issued $1,000 million face amount of senior notes
with an interest rate of 5.70% for net cash proceeds of approximately $990
million, (ii) received cash proceeds of $3,629 million upon the sale of assets
and the settlement of financial instruments related to certain of our
available-for-sale securities and (iii) received premium proceeds of $783
million from the origination of financial instruments.

     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 $2,593 million and $458 million,
respectively, during the year ended December 31, 2003. Included in the foregoing
amounts is $1,166 million invested in InterActiveCorp pursuant to contractual
pre-emptive rights and $388 million invested in J-COM. Other uses of cash in
2003 include debt repayments of $3,508 million, cash paid for acquisitions of
$711 million and stock repurchases of $437 million.

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

     Our liquidity needs in 2004 include an approximate $1.0 billion reduction
in our corporate indebtedness pursuant to our debt reduction plan, as well as
continued funding of our existing investees as they develop and expand their
businesses. We currently anticipate such cash investments to aggregate $1,400
million to $1,700 million in 2004. Included in the foregoing estimate is
approximately $600 million that we invested in UGC in the first quarter of 2004
to (1) exercise our pre-emptive rights and (2) participate in UGC's rights
offering and approximately $450 million that we invested in News Corp. We may
also invest additional amounts in new or existing ventures. However, we are
unable to quantify such investments at this time. We

                                      II-21
<PAGE>

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

     We expect that these investing and financing activities will be funded with
a combination of cash on hand, cash provided by operating activities, proceeds
from equity collar expirations and dispositions of non-strategic assets. In this
regard, we expect to receive cash proceeds of $547 million in 2004, $1,311
million in 2005, $744 million in 2006, $389 million in 2007, $405 million in
2008, and $4,267 million thereafter upon settlement of our AFS Derivatives. The
foregoing amounts assume we physically settle all derivatives and exclude any
provision for income taxes. With the repayment of the bank debt of our
wholly-owned subsidiaries and our acquisition of the controlling interest in
QVC, we also expect to have access to the cash generated by the operating
activities of our subsidiaries to the extent such cash exceeds the working
capital needs of the subsidiaries and is not otherwise restricted.

     Prior to the maturity of our equity collars, the terms of certain of our
equity and narrow-band collars allow us to borrow funds equal to the present
value of future put option proceeds (which we refer to as the PV Amount) at a
rate equal to LIBOR at the time of borrowing. As of December 31, 2003, such
amount aggregated approximately $3,922 million. We may also borrow the
difference between the PV Amount and future put option proceeds at a rate equal
to LIBOR plus our applicable credit spread at the time of borrowing. As of
December 31, 2003, this amount aggregated approximately $936 million.

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

     Based on currently available information, we expect to receive
approximately $100 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 $470 million during the year
ended December 31, 2004, primarily all of which relates to parent company debt.

  SUBSIDIARIES

     At December 31, 2003, 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. At December 31,
2003, our subsidiary that operates the DMX Music service was not in compliance
with three covenants contained in its bank loan agreement. The subsidiary and
the participating banks have entered into a forbearance agreement whereby the
banks have agreed to forbear from exercising certain default-related remedies
against the subsidiary through March 31, 2004. The subsidiary will not be able
to repay its debt when the forbearance agreement expires and is currently
considering its financing options. The outstanding balance of the subsidiary's
bank facility was $89 million at December 31, 2003. All other consolidated
subsidiaries were in compliance with their debt covenants at December 31, 2003.
Starz Encore's ability to borrow the unused capacity noted above is dependent on
its continuing compliance with its covenants at the time of, and after giving
effect to, a requested borrowing.

  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
                                      II-22
<PAGE>

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.

     UGC.  UGC and its significant operating subsidiaries have incurred losses
since their formation, as they have attempted to expand and develop their
businesses and introduce new services.

     On September 3, 2003, United Pan-Europe Communications N.V. ("UPC"), a
consolidated subsidiary of UGC, completed a restructuring of its debt
instruments and emerged from bankruptcy. Under the terms of the restructuring,
approximately $5.4 billion of UPC's debt was exchanged for equity of UGC Europe,
Inc., a new holding company of UPC. Upon consummation, UGC received
approximately 65.5% of UGC Europe's equity in exchange for UPC debt securities
that it owned; third-party noteholders received approximately 32.5% of UGC
Europe's equity; and existing preferred and ordinary shareholders, including
UGC, received 2% of UGC Europe's equity. In January 2004, UGC also amended the
E3,500 million bank facility of UGC Europe to, among other things, adjust
certain financial covenants which require UGC Europe to maintain specified
minimum or maximum financial ratios, reschedule payment maturities, reset
interest rates on various tranches of indebtedness and to permit additional
borrowings in certain instances. At December 31, 2003 there was approximately
E2,900 million outstanding on this facility.

     On December 18, 2003, UGC completed its offer to exchange shares of its
Class A common stock for 13 million outstanding shares of UGC Europe common
stock that it did not already own. Upon completion of the exchange offer, UGC
owned 92.7% of the outstanding shares of UGC Europe common stock. On December
19, 2003, UGC effected a "short-form" merger with UGC Europe. In the short-form
merger each share of UGC Europe common stock not tendered in the exchange offer
was converted into the right to receive the same consideration offered in the
exchange offer, and UGC acquired the remaining 7.3% of UGC Europe.

     At December 31, 2003, we owned approximately 307 million shares of UGC
common stock, which represents an approximate 52% economic interest and a 90%
voting interest in UGC. Due to certain voting and standstill arrangements, we
were unable to exercise control of UGC, and accordingly, we used the equity
method of accounting for our investment.

     On January 5, 2004, we completed a transaction pursuant to which UGC's
founding shareholders (the "Founders") transferred 8.2 million shares of UGC
Class B common stock to us in exchange for 12.6 million shares of our Series A
common stock and a cash payment of approximately $13 million. Upon closing of
the exchange, the restrictions on the exercise by us of our voting power with
respect to UGC terminated, and we gained voting control of UGC. Accordingly, UGC
will be included in our consolidated financial position and results of
operations beginning January 2004. We have entered into a new Standstill
Agreement with UGC that limits our ownership of UGC common stock to 90 percent
of the outstanding common stock unless we make an offer or effect another
transaction to acquire all outstanding UGC common stock. Under certain
circumstances, such an offer or transaction would require an independent
appraisal to establish the price to be paid to stockholders unaffiliated with
us.

     In January 2004, we also purchased an additional 18.3 million shares of UGC
Class A common stock pursuant to certain pre-emptive rights granted to us
pursuant to our standstill agreement with UGC. The $140 million purchase price
for such shares was comprised of (1) the cancellation of indebtedness due from
subsidiaries of UGC to certain of our subsidiaries in the amount of $104 million
(including accrued interest) and (2) $36 million in cash.

     Also in January 2004, UGC initiated a rights offering pursuant to which
holders of each of UGC's Class A, Class B and Class C common stock received .28
transferable subscription rights to purchase a like class of common stock for
each share of common stock owned by them on January 21, 2004. The rights
offering originally expired on February 6, 2004, but was subsequently extended
to February 12, 2004. UGC received cash proceeds of approximately $1.02 billion
from the rights offering and expects to use such cash proceeds for working
capital and general corporate purposes, including future acquisitions and
repayment of

                                      II-23
<PAGE>

outstanding indebtedness. As a holder of UGC Class A, Class B and Class C common
stock, we participated in the rights offering and exercised our rights to
purchase 94.1 million shares for a total cash purchase price of $565 million.
Subsequent to the foregoing transactions, we own approximately 55% of UGC's
common stock representing approximately 92% of the voting power of UGC's shares.

OFF-BALANCE SHEET ARRANGEMENTS AND AGGREGATE CONTRACTUAL OBLIGATIONS

     Starz Encore has entered into agreements with a number of motion picture
producers which obligate Starz Encore to pay fees for the rights to exhibit
certain films that are released by these producers. The unpaid balance under
agreements for film rights related to films that were available at December 31,
2003 is reflected as a liability in the accompanying consolidated balance sheet.
The balance due as of December 31, 2003 is payable as follows: $177 million in
2004 and $48 million in 2005.

     Starz Encore has also contracted to pay fees for the rights to exhibit
films that have been released theatrically, but are not available for exhibition
by Starz Encore until some future date. These amounts have not been accrued at
December 31, 2003. Starz Encore's estimate of amounts payable under these
agreements is as follows: $558 million in 2004; $231 million in 2005; $140
million in 2006; $112 million in 2007; $108 million in 2008 and $233 million
thereafter.

     Starz Encore is also obligated to pay fees for films that are released by
certain producers through 2010 when these films meet certain criteria described
in the studio output agreements. The actual contractual amount to be paid under
these agreements is not known at this time. However, such amounts are expected
to be significant. Starz Encore's total film rights expense aggregated $398
million, $358 million and $354 million for the years ended December 31, 2003,
2002 and 2001, respectively.

     In addition to the foregoing contractual film obligations, two motion
picture studios that have output contracts with Starz Encore through 2006 and
2010, respectively, have the right to extend their contracts for an additional
three years. If the first studio elects to extend its contract, Starz Encore has
agreed to pay the studio $60 million within five days of the studio's notice to
extend. The studio is required to exercise its option by December 31, 2004. If
the second studio elects to extend its contract, Starz Encore has agreed to pay
the studio a total of $190 million in four annual installments. The studio is
required to exercise this option by December 31, 2007. If made, Starz Encore's
payments to the studios would be amortized ratably over the term of the
respective output agreement extension.

     Liberty guarantees Starz Encore's film licensing obligations under certain
of its studio output agreements. At December 31, 2003, Liberty's guarantee for
studio output obligations for films released by such date aggregated $799
million. While the guarantee amount for films not yet released is not
determinable, such amount is expected to be significant. As noted above, Starz
Encore has recognized the liability for a portion of its obligations under the
output agreements. As this represents a commitment of Starz Encore, a
consolidated subsidiary of ours, we have not recorded a separate liability for
our guarantee of these obligations.

     At December 31, 2003, Liberty guaranteed Y14.4 billion ($134 million) of
the bank debt of J-COM, an equity affiliate that provides broadband services in
Japan. Liberty's guarantees expire as the underlying debt matures and is repaid.
The debt maturity dates range from 2004 to 2018. In addition, Liberty has agreed
to fund up to Y10 billion ($93 million at December 31, 2003) to J-COM in the
event J-COM's cash flow (as defined in its bank loan agreement) does not meet
certain targets. In the event J-COM meets certain performance criteria, this
commitment expires on September 30, 2004.

     We have also guaranteed various leases, loans, notes payable, letters of
credit and other obligations (the "Guaranteed Obligations") of certain other
affiliates. At December 31, 2003, the Guaranteed Obligations aggregated
approximately $160 million and are not reflected in our balance sheet at
December 31, 2003. Currently, we are not certain of the likelihood of being
required to perform under such guarantees.

                                      II-24
<PAGE>

     Information concerning the amount and timing of required payments under our
contractual obligations is summarized below:

<Table>
<Caption>
                                                       PAYMENTS DUE BY PERIOD
                                        -----------------------------------------------------
                                                  LESS THAN                            AFTER
CONTRACTUAL OBLIGATIONS                  TOTAL     1 YEAR     1-3 YEARS   4-5 YEARS   5 YEARS
-----------------------                 -------   ---------   ---------   ---------   -------
                                                        (AMOUNTS IN MILLIONS)
<S>                                     <C>       <C>         <C>         <C>         <C>
Long-term debt(1).....................  $12,034    $  117      $3,684      $1,770     $6,463
Long-term derivative instruments......    1,756        --         472         555        729
Operating lease obligations...........      402        82         122          78        120
Film licensing obligations............    1,607       735         419         220        233
Purchase orders and other
  obligations.........................      788       788          --          --         --
Other long-term liabilities...........      108        --         108          --         --
                                        -------    ------      ------      ------     ------
Total contractual payments............  $16,695    $1,722      $4,805      $2,623     $7,545
                                        =======    ======      ======      ======     ======
</Table>

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

(1) Includes all debt instruments, including the call option feature related to
    our exchangeable debentures. Amounts are stated at the face amount at
    maturity and may differ from the amounts stated in our consolidated balance
    sheet to the extent debt instruments (i) were issued at a discount or
    premium or (ii) are reported at fair value in our consolidated balance
    sheet. Also includes capital lease obligations.

     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

                                      II-25
<PAGE>

that amounts, if any, which may be required to satisfy such contingencies will
not be material in relation to the accompanying consolidated financial
statements.

CRITICAL ACCOUNTING POLICIES

     The preparation of our financial statements in conformity with accounting
principles generally accepted in the United States requires us 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. Listed below are the accounting policies
that we believe are critical to our financial statements due to the degree of
uncertainty regarding the estimates or assumptions involved and the magnitude of
the asset, liability, revenue or expense being reported. All of these accounting
policies, estimates and assumptions, as well as the resulting impact to our
financial statements, have been discussed with our audit committee.

     Carrying Value of Investments.  Our cost and equity method investments
comprise 36.9% and 9.9%, respectively, of our total assets at December 31, 2003
and 36.2% and 18.6%, respectively, at December 31, 2002. We account for these
investments pursuant to Statement of Financial Accounting Standards No. 115,
Statement of Financial Accounting Standards No. 142 and Accounting Principles
Board Opinion No. 18. These accounting principles require us to periodically
evaluate our investments to determine if decreases in fair value below our cost
bases are other than temporary or "nontemporary." If a decline in fair value is
determined to be nontemporary, we are required to reflect such decline in our
statement of operations. Nontemporary declines in fair value of our cost
investments are recognized on a separate line in our statement of operations,
and nontemporary declines in fair value of our equity method investments are
included in share of losses of affiliates in our statement of operations.

     The primary factors we consider in our determination of whether declines in
fair value are nontemporary are the length of time that the fair value of the
investment is below our carrying value; and the financial condition, operating
performance and near term prospects of the investee. In addition, we consider
the reason for the decline in fair value, be it general market conditions,
industry specific or investee specific; analysts' ratings and estimates of 12
month share price targets for the investee; changes in stock price or valuation
subsequent to the balance sheet date; and our intent and ability to hold the
investment for a period of time sufficient to allow for a recovery in fair
value. Fair value of our publicly traded investments is based on the market
price of the security at the balance sheet date. We estimate the fair value of
our other cost and equity investments using a variety of methodologies,
including cash flow multiples, discounted cash flow, per subscriber values, or
values of comparable public or private businesses. Impairments are calculated as
the difference between our carrying value and our estimate of fair value. As our
assessment of the fair value of our investments and any resulting impairment
losses requires a high degree of judgment and includes significant estimates and
assumptions, actual results could differ materially from our estimates and
assumptions.

     Our evaluation of the fair value of our investments and any resulting
impairment charges are determined as of the most recent balance sheet date.
Changes in fair value subsequent to the balance sheet date due to the factors
described above are possible. Subsequent decreases in fair value will be
recognized in our statement of operations in the period in which they occur to
the extent such decreases are deemed to be nontemporary. Subsequent increases in
fair value will be recognized in our statement of operations only upon our
ultimate disposition of the investment.

     At December 31, 2003, we had no unrealized losses related to our
available-for-sale securities.

     Accounting for Acquisitions.  We acquired QVC in 2003 and OpenTV in 2002.
We account for all acquisitions of companies such as these pursuant to Statement
of Financial Accounting Standards No. 141, "Business Combinations," which
prescribes the purchase method of accounting for business combinations. Pursuant
to Statement 141, the purchase price is allocated to all of the assets and
liabilities of the acquired company, based on their respective fair values. Any
excess purchase price over the estimated fair value of the net assets is
recorded as goodwill.

                                      II-26
<PAGE>

     In determining fair value, we are required to make estimates and
assumptions that affect the recorded amounts. To assist in this process, we
often engage third party valuation specialists to value certain of the assets
and liabilities. Estimates used in these valuations may include expected future
cash flows (including timing thereof), market rate assumptions for contractual
obligations, expected useful lives of tangible and intangible assets and
appropriate discount rates. Our estimates of fair value are based on assumptions
believed to be reasonable, but which are inherently uncertain.

     The allocation of the purchase price to tangible and intangible assets
impacts our statement of operations due to the amortization of these assets.
With respect to the acquisition of QVC, the total purchase price of $7.9 billion
was allocated to QVC's net assets based on their estimated fair values as
determined by an independent valuation firm. QVC's more significant intangible
assets included customer relationships and cable and satellite distribution
rights, which are amortized over their respective useful lives, and trademarks,
which have an indefinite useful life and are not amortized. We also allocated a
portion of the purchase price to goodwill, which is not amortized. We estimate
that amortization expense related to the amortizable intangible assets will be
$312 million annually. If the allocation to QVC's amortizable assets had been
10% or $436 million more and the allocation to tradmarks and goodwill had been
$436 million less, our annual amortization expense would be $31 million higher.

     Accounting for Derivative Instruments.  We use various derivative
instruments, including equity collars, narrow-band collars, put spread collars,
written put and call options, interest rate swaps and foreign exchange
contracts, to manage fair value and cash flow risk associated with many of our
investments, some of our debt and transactions denominated in foreign
currencies. We account for these derivative instruments pursuant to Statement
133 and Statement of Financial Accounting Standards No. 149 "Amendment of
Statement No. 133 on Derivative Instruments and Hedging Activities." Statement
133 and Statement 149 require that all derivative instruments be recorded on the
balance sheet at fair value. Changes in derivatives designated as cash flow
hedges are recorded in other comprehensive income. Changes in derivatives
designated as fair value hedges and changes in derivatives not designated as
hedges are included in realized and unrealized gains (losses) on derivative
instruments in our statement of operations.

     We use the Black-Scholes model to estimate the fair value of our derivative
instruments that we use to manage market risk related to certain of our
available-for-sale securities. The Black-Scholes model incorporates a number of
variables in determining such fair values, including expected volatility of the
underlying security and an appropriate discount rate. We obtain volatility rates
from independent sources based on the expected volatility of the underlying
security over the term of the derivative instrument. The volatility assumption
is evaluated annually to determine if it should be adjusted, or more often if
there are indications that it should be adjusted. We obtain a discount rate at
the inception of the derivative instrument and update such rate each reporting
period based on our estimate of the discount rate at which we could currently
settle the derivative instrument. At December 31, 2003, the expected
volatilities used to value our AFS Derivatives generally ranged from 25% to 56%
and the discount rates ranged from 1.46% to 4.86%. Considerable management
judgment is required in estimating the Black-Scholes variables. Actual results
upon settlement or unwinding of our derivative instruments may differ materially
from these estimates.

                                      II-27
<PAGE>

     Changes in our assumptions regarding (1) the discount rate and (2) the
volatility rates of the underlying securities that are used in the Black-Scholes
model would have the most significant impact on the valuation of our AFS
Derivatives. The table below summarizes changes in these assumptions and the
resulting impacts on our estimate of fair value.

<Table>
<Caption>
                                                          ESTIMATED AGGREGATE
                                                           FAIR VALUE OF AFS    DOLLAR VALUE
ASSUMPTION                                                    DERIVATIVES          CHANGE
----------                                                -------------------   ------------
                                                                (AMOUNTS IN MILLIONS)
<S>                                                       <C>                   <C>
As recorded at December 31, 2003........................        $2,605
25% increase in discount rate...........................        $2,403             $(202)
25% decrease in discount rate...........................        $2,818             $ 213
25% increase in expected volatilities...................        $2,569             $ (36)
25% decrease in expected volatilities...................        $2,646             $  41
</Table>

     Utilization of the Equity Method of Accounting for our Investment in
UGC.  At December 31, 2003, we owned approximately 52% of UGC's outstanding
equity representing approximately 90% of the voting power of UGC's common stock.
UGC's operating and financial decisions are controlled by its Board of
Directors. We held substantially all of our voting interest in UGC through Class
C common shares of which we were the only Class C shareholder. Under UGC's
certificate of incorporation, the Class C shareholders are entitled to elect
only 4 of the 12 directors. The UGC Founders had effective control to elect the
remaining 8 directors through their ownership of UGC's Class B shares. Our
ability to convert our Class C shares into Class B shares and to elect a
majority of UGC's Board of Directors following such conversion was limited by
the terms of such shares and by a standstill agreement which was in effect until
June 2010. While an earlier termination of the standstill agreement was possible
in the event that the UGC Founders reduce their interests in Class B shares
below certain specified levels, it was outside our control to effect such an
early termination. The Class C shares had approval rights over certain material
transactions and related party matters which were considered protective in
nature.

     As a result of the aforementioned governance arrangements, we determined
that our voting interest was not sufficient to allow us to control UGC and
therefore apply consolidation accounting with respect to our investment in UGC.
We did consider our Class C shareholder rights sufficient to exert significant
influence over the financial and operating policies of UGC, and accordingly, we
applied the equity method of accounting for this investment.

     On January 5, 2004, we completed a transaction pursuant to which the UGC
Founders transferred 8.2 million shares of UGC Class B common stock to us in
exchange for 12.6 million shares of our Series A common stock and a cash payment
of approximately $13 million. Upon closing of the exchange, the restrictions on
our right to exercise our voting power with respect to UGC were terminated, and
we gained voting control of UGC. Accordingly, we will begin consolidating UGC's
results of operations and financial position in January 2004. We are currently
in the process of quantifying the appropriate purchase accounting and
consolidation adjustments related to UGC, and we expect the application of
consolidation accounting for UGC will have a significant effect on our financial
position and results of operations.

     Carrying Value of Long-lived Assets.  Our property and equipment,
intangible assets and goodwill (collectively, our "long-lived assets") also
comprise a significant portion of our total assets at December 31, 2003 and
2002. We account for our long-lived assets pursuant to Statement of Financial
Accounting Standards No. 142 and Statement of Financial Accounting Standards No.
144. These accounting standards require that we periodically, or upon the
occurrence of certain triggering events, assess the recoverability of our
long-lived assets. If the carrying value of our long-lived assets exceeds their
estimated fair value, we are required to write the carrying value down to fair
value. Any such writedown is included in impairment of long-lived assets in our
consolidated statement of operations. A high degree of judgment is required to
estimate the fair value of our long-lived assets. We may use quoted market
prices, prices for similar assets, present value techniques and other valuation
techniques to prepare these estimates. In addition, we may obtain independent
appraisals in certain circumstances. We may need to make estimates of future
cash flows and discount rates as

                                      II-28
<PAGE>

well as other assumptions in order to implement these valuation techniques.
Accordingly, any value ultimately derived from our long-lived assets may differ
from our estimate of fair value. As each of our operating segments has
long-lived assets, this critical accounting policy affects the financial
position and results of operations of each segment.

     Starz Encore received an independent third party valuation in connection
with its annual year-end evaluation of the recoverability of its goodwill. The
result of this valuation, which was based on a discounted cash flow analysis of
projections prepared by the management of Starz Encore, indicated that the fair
value of this reporting unit was less than its carrying value including
goodwill. This reporting unit fair value was then used to calculate an implied
value of the goodwill related to Starz Encore. The $1,352 million excess of the
carrying amount of the goodwill (including $1,195 million of allocated
enterprise-level goodwill) over its implied value has been recorded as an
impairment charge in the fourth quarter of 2003. The reduction in the value of
Starz Encore reflected in the third party valuation is believed to be
attributable to a number of factors. Those factors include the reliance placed
in that valuation on projections by management reflecting a lower rate of
revenue growth compared to earlier projections based, among other things, on the
possibility that revenue growth may be negatively affected by (1) a reduction in
the rate of growth in total digital video subscribers and in the subscription
video on demand business as a result of cable operators' increased focus on the
marketing and sale of other services, such as high speed internet access and
telephony, and the uncertainty as to the success of marketing efforts by
distributors of Starz Encore's services and (2) lower per subscriber rates under
the new affiliation agreement with Comcast, as compared to the payments required
under the 1997 AT&T Broadband Affiliation Agreement (including the programming
pass through provision).

     Due to the slow-down in the movie and television industries in 2002 and
2001, Ascent Media recorded long-lived asset impairment charges of $84 million
and $313 million, respectively. In 2002 and 2001, we also recorded impairment
charges of $99 million and $75 million, respectively, the majority of which is
due to adverse economic conditions that affected our subsidiaries and affiliates
in South America; and we recorded a $92 million impairment charge in 2002
related to OpenTV Corp due to slower than expected growth in the interactive
television industry and cutbacks in capital expenditures by broadband service
providers.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

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

     We are exposed to changes in interest rates primarily as a result of our
borrowing and investment activities, which include investments in fixed and
floating rate debt instruments and borrowings used to maintain liquidity and to
fund business operations. The nature and amount of our long-term and short-term
debt are expected to vary as a result of future requirements, market conditions
and other factors. We manage our exposure to interest rates by maintaining what
we believe is an appropriate mix of fixed and variable rate debt. We believe
this best protects us from interest rate risk. We have achieved this mix by (i)
issuing fixed rate debt that we believe has a low stated interest rate and
significant term to maturity and (ii) issuing short-term variable rate debt to
take advantage of historically low short-term interest rates. As of December 31,
2003, the face amount of our fixed rate debt (considering the effects of
interest rate swap agreements) was $8,168 million, which had a weighted average
stated interest rate of 4.68%. Our variable rate debt of $3,807 million had a
weighted average interest rate of 2.31% at December 31, 2003. Had market
interest rates been 100 basis points higher (representing an approximate 43%
increase over our variable rate debt effective cost of borrowing) throughout the
year ended December 31, 2003, we would have recognized approximately $27 million
of additional interest expense. Had the estimated value of the call option
obligations associated with our senior exchangeable debentures been 10% higher
during the year ended December 31, 2003, we would have recognized an additional
unrealized loss on derivative instruments of $99 million. For additional

                                      II-29
<PAGE>

information regarding the impacts of changes in discount rates and volatilities
on our derivative instruments, see "Critical Accounting Policies-Accounting for
Derivatives."

     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 are equally priced at the time of origination resulting in no cash
receipts or payments. Narrow-band collars are equity collars in which the put
and call prices are set so that the call option has a relatively higher fair
value than the put option at the time of origination. In these cases 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.

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

<Table>
<Caption>
                                                    ESTIMATED AGGREGATE FAIR VALUE
                                           -------------------------------------------------
                                                          PUT
                                             EQUITY     SPREAD      PUT      CALL
                                           COLLARS(1)   COLLARS   OPTIONS   OPTIONS   TOTAL
                                           ----------   -------   -------   -------   ------
                                                         (AMOUNTS IN MILLIONS)
<S>                                        <C>          <C>       <C>       <C>       <C>
Fair value at December 31, 2003..........    $3,066      $331      $(774)    $(18)    $2,605
5% increase in market prices.............    $2,940      $330      $(742)    $(24)    $2,504
10% increase in market prices............    $2,815      $327      $(709)    $(30)    $2,403
5% decrease in market prices.............    $3,190      $333      $(807)    $(12)    $2,704
10% decrease in market prices............    $3,315      $334      $(840)    $ (7)    $2,802
</Table>

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

(1) Includes narrow-band collars.

     At December 31, 2003, the fair value of our available-for-sale securities
was $19,875 million. Had the market price of such securities been 10% lower at
December 31, 2003, the aggregate value of such securities would have been $1,988
million lower resulting in an increase to unrealized losses in other
comprehensive earnings. Such decrease would be partially offset by an increase
in the value of our AFS Derivatives as noted in the table above. Had the stock
price of our publicly traded investments accounted for using the equity method
been 10% lower at December 31, 2003, there would have been no impact on the
carrying value of such investments assuming that the decline in value is deemed
to be temporary.

     Investments in and advances to our foreign affiliates are denominated in
foreign currencies. Therefore, we are exposed to changes in foreign currency
exchange rates. We do not hedge the majority of our foreign currency exchange
risk because of the long-term nature of our interests in foreign affiliates.
However, in order to reduce our foreign currency exchange risk related to our
recent investment in J-COM, we have entered into

                                      II-30
<PAGE>

forward sale contracts with respect to Y20,802 million ($194 million at December
31, 2003). In addition to the forward sale contracts, we entered into collar
agreements with respect to Y28,785 million ($268 million at ]December 31, 2003).
These collar agreements have a remaining term of approximately one year, an
average call price of 108 yen/U.S. dollar and an average put price of 125
yen/U.S. dollar. During 2003, we had unrealized losses of $23 million related to
our yen contracts. We continually evaluate our foreign currency exposure based
on current market conditions and the business environment in each country in
which we operate.

     From time to time we enter into total return debt swaps in connection with
our purchase of our own or third-party public and private indebtedness. Under
these arrangements, we direct a counterparty to purchase a specified amount of
the underlying debt security for our benefit. We initially post collateral with
the counterparty equal to 10% of the value of the purchased securities. We earn
interest income based upon the face amount and stated interest rate of the
underlying debt securities, and we pay interest expense at market rates on the
amount funded by the counterparty. In the event the fair value of the underlying
debt securities declines 10%, we are required to post cash collateral for the
decline, and we record an unrealized loss on financial instruments. The cash
collateral is further adjusted up or down for subsequent changes in fair value
of the underlying debt security. At December 31, 2003, the aggregate purchase
price of debt securities underlying total return debt swap arrangements was $314
million ($200 million of which related to our senior notes and debentures). As
of such date, we had posted cash collateral equal to $35 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 $279 million.

     We periodically assess the effectiveness of our derivative financial
instruments. With regard to interest rate swaps, we monitor the fair value of
interest rate swaps as well as the effective interest rate the interest rate
swap yields, in comparison to historical interest rate trends. We believe that
any losses incurred with regard to interest rate swaps would be offset by the
effects of interest rate movements on the underlying debt facilities. With
regard to equity collars, we monitor historical market trends relative to values
currently present in the market. We believe that any unrealized losses incurred
with regard to equity collars and swaps would be offset by the effects of fair
value changes on the underlying assets. These measures allow our management to
measure the success of its use of derivative instruments and to determine when
to enter into or exit from derivative instruments.

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

     - execute our derivative instruments with several different counterparties,
       and

     - execute equity derivative instrument agreements which contain a provision
       that requires the counterparty to post the "in the money" portion of the
       derivative instrument into a cash collateral account for our benefit, if
       the respective counterparty's credit rating for its senior secured 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.

                                      II-31
<PAGE>

     Our counterparty credit risk by financial institution is summarized below:

<Table>
<Caption>
                                                                AGGREGATE FAIR VALUE OF
                                                               DERIVATIVE INSTRUMENTS AT
COUNTERPARTY                                                       DECEMBER 31, 2003
------------                                                   -------------------------
                                                                 (AMOUNTS IN MILLIONS)
<S>                                                            <C>
Counterparty A..............................................            $  998
Counterparty B..............................................               784
Counterparty C..............................................               692
Counterparty D..............................................               500
Counterparty E..............................................               316
Other.......................................................               523
                                                                        ------
                                                                        $3,813
                                                                        ======
</Table>

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

     The consolidated financial statements of Liberty Media Corporation are
filed under this Item, beginning on Page II-33. The financial statement
schedules required by Regulation S-X are filed under Item 15 of this Annual
Report on Form 10-K.

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE.

     None.

ITEM 9A.  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 December 31, 2003 to
provide reasonable assurance that information required to be disclosed in its
reports filed or submitted under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms.

     There has been no change in the Company's internal controls over financial
reporting that occurred during the three months ended December 31, 2003 that has
materially affected, or is reasonably likely to materially affect, its internal
controls over financial reporting.

                                      II-32
<PAGE>

                          INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
Liberty Media Corporation:

     We have audited the accompanying consolidated balance sheets of Liberty
Media Corporation and subsidiaries as of December 31, 2003 and 2002, and the
related consolidated statements of operations, comprehensive earnings (loss),
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 2003. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

     We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Liberty
Media Corporation and subsidiaries as of December 31, 2003 and 2002, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2003, in conformity with accounting
principles generally accepted in the United States of America.

     As discussed in note 2 to the consolidated financial statements, the
Company changed its method of accounting for intangible assets in 2002 and for
derivative financial instruments in 2001.

                                          KPMG LLP

Denver, Colorado
March 12, 2004

                                      II-33
<PAGE>

                   LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 2003 AND 2002

<Table>
<Caption>
                                                                2003       2002
                                                              --------   --------
                                                                  (AMOUNTS IN
                                                                   MILLIONS)
<S>                                                           <C>        <C>
                                     ASSETS
Current assets:
  Cash and cash equivalents.................................  $  3,063   $  2,170
  Short-term investments (note 6)...........................       265        107
  Trade and other receivables, net..........................     1,100        362
  Inventory, net............................................       588         --
  Prepaid expenses and program rights.......................       533        355
  Derivative instruments (note 7)...........................       543      1,165
  Deferred income tax assets (note 10)......................       256        286
  Other current assets......................................        71         55
                                                              --------   --------
    Total current assets....................................     6,419      4,500
                                                              --------   --------
Investments in available-for-sale securities and other cost
  investments (note 6)......................................    19,949     14,369
Long-term derivative instruments (note 7)...................     3,270      4,392
Investments in affiliates, accounted for using the equity
  method, and related receivables (note 5)..................     5,354      7,390
Property and equipment, at cost.............................     2,076      1,219
Accumulated depreciation....................................      (568)      (304)
                                                              --------   --------
                                                                 1,508        915
                                                              --------   --------
Intangible assets not subject to amortization (notes 2 and
  4):
  Goodwill..................................................     9,437      6,812
  Trademarks................................................     2,385         --
  Franchise costs...........................................       163        163
                                                              --------   --------
                                                                11,985      6,975
                                                              --------   --------
Intangible assets subject to amortization (note 4)..........     5,672      1,246
Accumulated amortization....................................      (733)      (632)
                                                              --------   --------
                                                                 4,939        614
                                                              --------   --------
Other assets, at cost, net of accumulated amortization......       589        530
                                                              --------   --------
    Total assets............................................  $ 54,013   $ 39,685
                                                              ========   ========

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Accounts payable..........................................  $    431   $    133
  Accrued interest payable..................................       153        125
  Other accrued liabilities.................................       878        308
  Accrued stock compensation (note 13)......................       205        659
  Program rights payable....................................       177        128
  Derivative instruments (note 7)...........................       875         19
  Current portion of debt (note 9)..........................       117        655
                                                              --------   --------
    Total current liabilities...............................     2,836      2,027
                                                              --------   --------
Long-term debt (note 9).....................................     9,482      4,316
Long-term derivative instruments (note 7)...................     1,756      1,469
Deferred income tax liabilities (note 10)...................    10,506      6,751
Other liabilities...........................................       298        189
                                                              --------   --------
    Total liabilities.......................................    24,878     14,752
                                                              --------   --------
Minority interests in equity of subsidiaries................       293        219
Obligation to redeem common stock (note 11).................        --         32
Stockholders' equity (note 11):
  Preferred stock, $.01 par value. Authorized 50,000,000
    shares; no shares issued and outstanding................        --         --
  Series A common stock $.01 par value. Authorized
    4,000,000,000 shares; issued and outstanding
    2,669,835,166 shares at December 31, 2003 and
    2,476,953,566 shares at December 31, 2002...............        27         25
  Series B common stock $.01 par value. Authorized
    400,000,000 shares; issued and outstanding 217,100,515
    shares at December 31, 2003 and 212,044,128 shares at
    December 31, 2002.......................................         2          2
  Additional paid-in capital................................    39,001     36,498
  Accumulated other comprehensive earnings, net of taxes
    (note 15)...............................................     3,201        226
  Unearned compensation (note 13)...........................       (98)        --
  Accumulated deficit.......................................   (13,291)   (12,069)
                                                              --------   --------
    Total stockholders' equity..............................    28,842     24,682
                                                              --------   --------
Commitments and contingencies (note 17)
    Total liabilities and stockholders' equity..............  $ 54,013   $ 39,685
                                                              ========   ========
</Table>

          See accompanying notes to consolidated financial statements.
                                      II-34
<PAGE>

                   LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                  YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001

<Table>
<Caption>
                                                               2003      2002       2001
                                                              -------   -------   --------
                                                                 (AMOUNTS IN MILLIONS,
                                                               EXCEPT PER SHARE AMOUNTS)
<S>                                                           <C>       <C>       <C>
Revenue:
  Net sales from electronic retailing.......................  $ 1,973   $    --   $     --
  Programming and other services............................    2,055     2,084      2,059
                                                              -------   -------   --------
                                                                4,028     2,084      2,059
                                                              -------   -------   --------
Operating costs and expenses:
  Cost of sales -- electronic retailing services............    1,258        --         --
  Operating.................................................    1,298     1,077      1,103
  Selling, general and administrative ("SG&A")..............      640       583        579
  Stock compensation -- SG&A (note 13)......................      (84)      (51)       132
  Depreciation..............................................      225       193        209
  Amortization..............................................      285       191        775
  Impairment of long-lived assets (note 2)..................    1,362       275        388
                                                              -------   -------   --------
                                                                4,984     2,268      3,186
                                                              -------   -------   --------
       Operating loss.......................................     (956)     (184)    (1,127)
Other income (expense):
  Interest expense..........................................     (539)     (423)      (525)
  Dividend and interest income..............................      189       209        272
  Share of earnings (losses) of affiliates, net (note 5)....       58      (453)    (4,906)
  Nontemporary declines in fair value of investments (note
     6).....................................................      (29)   (6,053)    (4,101)
  Realized and unrealized gains (losses) on derivative
     instruments, net (note 7)..............................     (649)    2,122       (174)
  Gains (losses) on dispositions, net (notes 5 and 6).......    1,128      (415)      (310)
  Other, net................................................      (52)       (4)       (11)
                                                              -------   -------   --------
                                                                  106    (5,017)    (9,755)
                                                              -------   -------   --------
     Loss before income taxes and minority interest.........     (850)   (5,201)   (10,882)
Income tax benefit (expense) (note 10)......................     (374)    1,702      3,908
Minority interests in losses of subsidiaries................        2        38        226
                                                              -------   -------   --------
     Loss before cumulative effect of accounting change.....   (1,222)   (3,461)    (6,748)
Cumulative effect of accounting change, net of taxes (note
  2)........................................................       --    (1,869)       545
                                                              -------   -------   --------
     Net loss...............................................  $(1,222)   (5,330)    (6,203)
                                                              =======   =======   ========
Loss per common share (note 2):
  Basic and diluted loss before cumulative effect of
     accounting change......................................  $  (.44)  $ (1.34)  $  (2.61)
  Cumulative effect of accounting change, net of taxes......       --      (.72)       .21
                                                              -------   -------   --------
  Basic and diluted net loss................................  $  (.44)  $ (2.06)  $  (2.40)
                                                              =======   =======   ========
Number of common shares outstanding.........................    2,748     2,590      2,588
                                                              =======   =======   ========
</Table>

          See accompanying notes to consolidated financial statements.
                                      II-35
<PAGE>

                   LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

            CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS (LOSS)
                  YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001

<Table>
<Caption>
                                                               2003      2002      2001
                                                              -------   -------   -------
                                                                 (AMOUNTS IN MILLIONS)
<S>                                                           <C>       <C>       <C>
Net loss....................................................  $(1,222)  $(5,330)  $(6,203)
                                                              -------   -------   -------
Other comprehensive earnings (loss), net of taxes (note 15):
  Foreign currency translation adjustments..................      149      (101)     (357)
  Unrealized holding gains (losses) arising during the
     period.................................................    3,454    (4,111)   (1,013)
  Recognition of previously unrealized losses (gains) on
     available-for-sale securities, net.....................     (628)    3,598     2,694
  Cumulative effect of accounting change (note 2)...........       --        --       (87)
                                                              -------   -------   -------
  Other comprehensive earnings (loss).......................    2,975      (614)    1,237
                                                              -------   -------   -------
Comprehensive earnings (loss)...............................  $ 1,753   $(5,944)  $(4,966)
                                                              =======   =======   =======
</Table>

          See accompanying notes to consolidated financial statements.
                                      II-36
<PAGE>

                   LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                  YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
<Table>
<Caption>
                                                                                        ACCUMULATED
                                                                                           OTHER
                                                    COMMON STOCK         ADDITIONAL    COMPREHENSIVE
                                   PREFERRED   -----------------------    PAID-IN     EARNINGS (LOSS),     UNEARNED
                                     STOCK       SERIES A     SERIES B    CAPITAL       NET OF TAXES     COMPENSATION
                                   ---------   ------------   --------   ----------   ----------------   ------------
                                                                 (AMOUNTS IN MILLIONS)
<S>                                <C>         <C>            <C>        <C>          <C>                <C>
Balance at January 1, 2001.......    $  --         $--         $  --      $35,042          $ (397)          $  --
  Net loss.......................       --          --            --           --              --              --
  Other comprehensive earnings...       --          --            --           --           1,237              --
  Issuance of common stock upon
    consummation of Split Off
    Transaction (note 8).........       --          24             2          (26)             --              --
  Contribution from AT&T upon
    consummation of Split Off
    Transaction (note 8).........       --          --            --          803              --              --
  Accrual of amounts due to AT&T
    for taxes on deferred
    intercompany gains (note
    8)...........................       --          --            --         (115)             --              --
  Losses in connection with
    issuances of stock by
    subsidiaries and affiliates,
    net of taxes.................       --          --            --           (8)             --              --
  Utilization of net operating
    losses of Liberty by AT&T
    prior to Split Off
    Transaction (note 8).........       --          --            --           (2)             --              --
  Stock option exercises and
    issuance of restricted stock
    prior to Split Off
    Transaction..................       --          --            --          302              --              --
                                     -----         ---         -----      -------          ------           -----
Balance at December 31, 2001.....       --          24             2       35,996             840              --
  Net loss.......................       --          --            --           --              --              --
  Other comprehensive loss.......       --          --            --           --            (614)             --
  Issuance of common stock for
    acquisitions.................       --          --            --          195              --              --
  Issuance of common stock
    pursuant to rights
    offering.....................       --           1            --          617              --              --
  Purchases of Liberty Series A
    common stock.................       --          --            --         (281)             --              --
  Liberty Series A common stock
    put options, net of cash
    received (note 11)...........       --          --            --          (29)             --              --
                                     -----         ---         -----      -------          ------           -----
Balance at December 31, 2002.....       --          25             2       36,498             226              --
  Net loss.......................       --          --            --           --              --              --
  Other comprehensive earnings...       --          --            --           --           2,975              --
  Issuance of Series A common
    stock for acquisitions.......       --           2            --        2,654              --              --
  Issuance of Series A common
    stock for cash...............       --          --            --          141              --              --
  Purchases of Liberty Series A
    common stock.................       --          --            --         (437)             --              --
  Issuance of restricted stock...       --          --            --          102              --            (102)
  Amortization of deferred
    compensation.................       --          --            --           --              --               4
  Liberty Series A common stock
    put options, net of cash
    received (note 11)...........       --          --            --           37              --              --
  Gain in connection with the
    issuance of stock of a
    subsidiary...................       --          --            --            6              --              --
                                     -----         ---         -----      -------          ------           -----
Balance at December 31, 2003.....    $  --         $27         $   2      $39,001          $3,201           $ (98)
                                     =====         ===         =====      =======          ======           =====

<Caption>

                                                     TOTAL
                                   ACCUMULATED   STOCKHOLDERS'
                                     DEFICIT        EQUITY
                                   -----------   -------------
                                      (AMOUNTS IN MILLIONS)
<S>                                <C>           <C>
Balance at January 1, 2001.......   $   (536)       $34,109
  Net loss.......................     (6,203)        (6,203)
  Other comprehensive earnings...         --          1,237
  Issuance of common stock upon
    consummation of Split Off
    Transaction (note 8).........         --             --
  Contribution from AT&T upon
    consummation of Split Off
    Transaction (note 8).........         --            803
  Accrual of amounts due to AT&T
    for taxes on deferred
    intercompany gains (note
    8)...........................         --           (115)
  Losses in connection with
    issuances of stock by
    subsidiaries and affiliates,
    net of taxes.................         --             (8)
  Utilization of net operating
    losses of Liberty by AT&T
    prior to Split Off
    Transaction (note 8).........         --             (2)
  Stock option exercises and
    issuance of restricted stock
    prior to Split Off
    Transaction..................         --            302
                                    --------        -------
Balance at December 31, 2001.....     (6,739)        30,123
  Net loss.......................     (5,330)        (5,330)
  Other comprehensive loss.......         --           (614)
  Issuance of common stock for
    acquisitions.................         --            195
  Issuance of common stock
    pursuant to rights
    offering.....................         --            618
  Purchases of Liberty Series A
    common stock.................         --           (281)
  Liberty Series A common stock
    put options, net of cash
    received (note 11)...........         --            (29)
                                    --------        -------
Balance at December 31, 2002.....    (12,069)        24,682
  Net loss.......................     (1,222)        (1,222)
  Other comprehensive earnings...         --          2,975
  Issuance of Series A common
    stock for acquisitions.......         --          2,656
  Issuance of Series A common
    stock for cash...............         --            141
  Purchases of Liberty Series A
    common stock.................         --           (437)
  Issuance of restricted stock...         --             --
  Amortization of deferred
    compensation.................         --              4
  Liberty Series A common stock
    put options, net of cash
    received (note 11)...........         --             37
  Gain in connection with the
    issuance of stock of a
    subsidiary...................         --              6
                                    --------        -------
Balance at December 31, 2003.....   $(13,291)       $28,842
                                    ========        =======
</Table>

          See accompanying notes to consolidated financial statements.
                                      II-37
<PAGE>

                   LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                  YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001

<Table>
<Caption>
                                                               2003      2002      2001
                                                              -------   -------   -------
                                                                 (AMOUNTS IN MILLIONS)
                                                                     (SEE NOTE 3)
<S>                                                           <C>       <C>       <C>
Cash flows from operating activities:
  Net loss..................................................  $(1,222)  $(5,330)  $(6,203)
  Adjustments to reconcile net loss to net cash provided
    (used) by operating activities:
    Cumulative effect of accounting change, net of taxes....       --     1,869      (545)
    Depreciation and amortization...........................      510       384       984
    Impairment of long-lived assets.........................    1,362       275       388
    Stock compensation......................................      (84)      (51)      132
    Payments of stock compensation..........................     (360)     (117)     (244)
    Share of losses (earnings) of affiliates, net...........      (58)      453     4,906
    Nontemporary decline in fair value of investments.......       29     6,053     4,101
    Realized and unrealized losses (gains) on derivative
      instruments, net......................................      649    (2,122)      174
    Losses (gains) on disposition of assets, net............   (1,128)      415       310
    Minority interests in losses of subsidiaries............       (2)      (38)     (226)
    Deferred income tax expense (benefit)...................      312    (1,711)   (3,613)
    Intergroup tax allocation...............................       --        --      (222)
    Payments from (to) AT&T pursuant to tax sharing
      agreement.............................................       --       (26)      166
    Other noncash charges...................................      136        32        40
    Changes in operating assets and liabilities, net of the
      effect of acquisitions and dispositions:
         Receivables........................................     (184)      (22)       30
         Inventory..........................................      (14)       --        --
         Prepaid expenses and other current assets..........     (141)      (77)     (148)
         Payables and other current liabilities.............      183        14        (4)
                                                              -------   -------   -------
           Net cash provided (used) by operating
               activities...................................      (12)        1        26
                                                              -------   -------   -------
Cash flows from investing activities:
  Cash proceeds from dispositions...........................    2,457     1,040       471
  Premium proceeds from origination of derivative
    instruments.............................................      783       521       383
  Proceeds from settlement of derivative instruments........    1,172       410       366
  Investments in and loans to equity affiliates.............     (458)     (736)   (1,031)
  Investments in and loans to cost investees................   (2,593)     (491)   (1,548)
  Cash paid for acquisitions, net of cash acquired..........     (711)      (44)     (113)
  Capital expended for property and equipment...............     (178)     (189)     (358)
  Net sales of short term investments.......................      162       148       346
  Other investing activities, net...........................      (40)       19        (5)
                                                              -------   -------   -------
    Net cash provided (used) by investing activities........      594       678    (1,489)
                                                              -------   -------   -------
Cash flows from financing activities:
  Borrowings of debt........................................    3,793       189     1,639
  Proceeds attributed to call option obligations upon
    issuance of senior exchangeable debentures..............      406        --     1,028
  Repayments of debt........................................   (3,508)   (1,110)   (1,048)
  Purchases of Liberty Series A common stock................     (437)     (281)       --
  Proceeds from issuance of common stock....................      141       618        --
  Payment from AT&T related to Split Off Transaction........       --        --       803
  Cash transfers to related parties.........................       --        --      (157)
  Other financing activities, net...........................      (84)       (2)      (20)
                                                              -------   -------   -------
    Net cash provided (used) by financing activities........      311      (586)    2,245
                                                              -------   -------   -------
       Net increase in cash and cash equivalents............      893        93       782
       Cash and cash equivalents at beginning of year.......    2,170     2,077     1,295
                                                              -------   -------   -------
       Cash and cash equivalents at end of year.............  $ 3,063   $ 2,170   $ 2,077
                                                              =======   =======   =======
</Table>

          See accompanying notes to consolidated financial statements.
                                      II-38
<PAGE>

                   LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 2003, 2002 AND 2001

(1)  BASIS OF PRESENTATION

     The accompanying consolidated financial statements include the accounts of
Liberty Media Corporation and its controlled subsidiaries ("Liberty" or the
"Company," unless the context otherwise requires). All significant intercompany
accounts and transactions have been eliminated in consolidation.

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

(2)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

  CASH AND CASH EQUIVALENTS

     Cash equivalents consist of investments which are readily convertible into
cash and have maturities of three months or less at the time of acquisition.

  RECEIVABLES

     Receivables are reflected net of an allowance for doubtful accounts. Such
allowance aggregated $109 million and $45 million at December 31, 2003 and 2002,
respectively. A summary of activity in the allowance for doubtful accounts is as
follows:

<Table>
<Caption>
                                                       ADDITIONS
                                    BALANCE    -------------------------                 BALANCE
                                   BEGINNING    CHARGED                    DEDUCTIONS-   END OF
                                    OF YEAR    TO EXPENSE   ACQUISITIONS   WRITE-OFFS     YEAR
                                   ---------   ----------   ------------   -----------   -------
                                                       (AMOUNTS IN MILLIONS)
<S>                                <C>         <C>          <C>            <C>           <C>
2003.............................     $45         $26           $62           $(24)       $109
                                      ===         ===           ===           ====        ====
2002.............................     $32         $23           $ 1           $(11)       $ 45
                                      ===         ===           ===           ====        ====
2001.............................     $27         $13           $--           $ (8)       $ 32
                                      ===         ===           ===           ====        ====
</Table>

  INVENTORY

     Inventory, consisting primarily of products held for sale, is stated at the
lower of cost or market. Cost is determined by the average cost method, which
approximates the first-in, first-out method.

  PROGRAM RIGHTS

     Prepaid program rights are amortized on a film-by-film basis over the
anticipated number of exhibitions. Committed program rights and program rights
payable are recorded at the estimated cost of the programs when the film is
available for airing less prepayments. These amounts are amortized on a
film-by-film basis over the anticipated number of exhibitions.

  INVESTMENTS

     All marketable equity and debt securities held by the Company are
classified as available-for-sale and are carried at fair value ("AFS
Securities"). Unrealized holding gains and losses on AFS Securities are carried

                                      II-39
<PAGE>
                   LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

net of taxes as a component of accumulated other comprehensive earnings in
stockholders' equity. Realized gains and losses are determined on an average
cost basis. Other investments in which the Company's ownership interest is less
than 20% and are not considered marketable securities are carried at cost.

     For those investments in affiliates in which the Company has the ability to
exercise significant influence, the equity method of accounting is used. Under
this method, the investment, originally recorded at cost, is adjusted to
recognize the Company's share of net earnings or losses of the affiliates as
they occur rather then as dividends or other distributions are received, limited
to the extent of the Company's investment in, advances to and commitments for
the investee. If the Company's investment in the common stock of an affiliate is
reduced to zero as a result of recording its share of the affiliate's net
losses, and the Company holds investments in other more senior securities of the
affiliate, the Company would continue to record losses from the affiliate to the
extent of these additional investments. The amount of additional losses recorded
would be determined based on changes in the hypothetical amount of proceeds that
would be received by the Company if the affiliate were to experience a
liquidation of its assets at their current book values. Prior to the Company's
January 1, 2002 adoption of Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets ("Statement 142"), the Company's share of
net earnings or losses of affiliates included the amortization of the difference
between the Company's investment and its share of the net assets of the
investee. Upon adoption of Statement 142, the portion of excess costs on equity
method investments that represents goodwill ("equity method goodwill") is no
longer amortized, but continues to be considered for impairment under Accounting
Principles Board Opinion No. 18. The Company's share of net earnings or loss of
affiliates also includes any other-than-temporary declines in fair value
recognized during the period.

     Changes in the Company's proportionate share of the underlying equity of a
subsidiary or equity method investee, which result from the issuance of
additional equity securities by such subsidiary or equity investee, are
recognized as increases or decreases in stockholders' equity.

     The Company continually reviews its investments to determine whether a
decline in fair value below the cost basis is other than temporary
("nontemporary"). The primary factors the Company considers in its determination
are the length of time that the fair value of the investment is below the
Company's carrying value; and the financial condition, operating performance and
near term prospects of the investee. In addition, the Company considers the
reason for the decline in fair value, be it general market conditions, industry
specific or investee specific; analysts' ratings and estimates of 12 month share
price targets for the investee; changes in stock price or valuation subsequent
to the balance sheet date; and the Company's intent and ability to hold the
investment for a period of time sufficient to allow for a recovery in fair
value. If the decline in fair value is deemed to be nontemporary, the cost basis
of the security is written down to fair value. In situations where the fair
value of an investment is not evident due to a lack of a public market price or
other factors, the Company uses its best estimates and assumptions to arrive at
the estimated fair value of such investment. The Company's assessment of the
foregoing factors involves a high degree of judgment and accordingly, actual
results may differ materially from the Company's estimates and judgments.
Writedowns for cost investments and AFS Securities are included in the
consolidated statements of operations as nontemporary declines in fair values of
investments. Writedowns for equity method investments are included in share of
earnings (losses) of affiliates.

  DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

     The Company uses various derivative instruments including equity collars,
narrow-band collars, put spread collars, written put and call options, bond
swaps, interest rate swaps and foreign exchange contracts to manage fair value
and cash flow risk associated with many of its investments, some of its variable
rate debt and transactions denominated in foreign currencies. Liberty's
derivative instruments are executed with counterparties who are well known major
financial institutions. While Liberty believes these derivative instruments
effectively manage the risks highlighted above, they are subject to counterparty
credit risk.

                                      II-40
<PAGE>
                   LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Counterparty credit risk is the risk that the counterparty is unable to perform
under the terms of the derivative instrument upon settlement of the derivative
instrument. To protect itself against credit risk associated with these
counterparties the Company generally:

     - executes its derivative instruments with several different
       counterparties, and

     - executes equity derivative instrument agreements which contain a
       provision that requires the counterparty to post the "in the money"
       portion of the derivative instrument into a cash collateral account for
       the Company's 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 its risk
management strategy, Liberty actively monitors the creditworthiness of each of
its counterparties. Based on its analysis, the Company currently considers
nonperformance by any of its counterparties to be unlikely.

     Effective January 1, 2001, Liberty adopted Statement of Financial
Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging
Activities" ("Statement 133"). All derivatives, whether designated in hedging
relationships or not, are recorded on the balance sheet at fair value. If the
derivative is designated as a fair value hedge, the changes in the fair value of
the derivative and of the hedged item attributable to the hedged risk are
recognized in earnings. If the derivative is designated as a cash flow hedge,
the effective portions of changes in the fair value of the derivative are
recorded in other comprehensive earnings. Ineffective portions of changes in the
fair value of cash flow hedges are recognized in earnings. If the derivative is
not designated as a hedge, changes in the fair value of the derivative are
recognized in earnings.

     During 2001 and 2002, the only derivative instruments designated as hedges
were the Company's equity collars, which were designated as fair value hedges.
Effective December 31, 2002, the Company elected to dedesignate its equity
collars as fair value hedges. Such election had no effect on the Company's
financial position at December 31, 2002 or its results of operations for the
year ended December 31, 2002. Subsequent to December 31, 2002, changes in the
fair value of the Company's AFS Securities that previously had been reported in
earnings due to the designation of equity collars as fair value hedges are
reported as a component of other comprehensive earnings (loss) on the Company's
consolidated balance sheet. Changes in the fair value of the equity collars
continue to be reported in earnings.

     The fair value of derivative instruments is estimated using third party
estimates or the Black-Scholes model. The Black-Scholes model incorporates a
number of variables in determining such fair values, including expected
volatility of the underlying security and an appropriate discount rate. The
Company obtains volatility rates from independent sources based on the expected
volatility of the underlying security over the term of the derivative
instrument. The volatility assumption is evaluated annually to determine if it
should be adjusted, or more often if there are indications that it should be
adjusted. A discount rate is obtained at the inception of the derivative
instrument and updated each reporting period based on the Company's estimate of
the discount rate at which it could currently settle the derivative instrument.
Considerable management judgment is required in estimating the Black-Scholes
variables. Actual results upon settlement or unwinding of derivative instruments
may differ materially from these estimates.

     The adoption of Statement 133 on January 1, 2001, resulted in a cumulative
increase in net earnings of $545 million, or $0.21 per common share (after tax
expense of $356 million), and an increase in other comprehensive loss of $87
million. The increase in net earnings was mostly attributable to separately
recording the fair value of the embedded call option obligations associated with
the Company's senior exchangeable debentures. The increase in other
comprehensive loss relates primarily to changes in the fair value of the
Company's warrants and options to purchase certain AFS Securities.

                                      II-41
<PAGE>
                   LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The Company assesses the effectiveness of equity collars by comparing
changes in the intrinsic value of the equity collar to changes in the fair value
of the underlying security. For derivatives designated as fair value hedges,
changes in the time value of the derivatives, which are excluded from the
assessment of hedge effectiveness, are recognized currently in earnings as a
component of realized and unrealized gains (losses) on derivative instruments.
Hedge ineffectiveness, determined in accordance with Statement 133, had no
impact on earnings for the years ended December 31, 2002 and 2001.

  PROPERTY AND EQUIPMENT

     Property and equipment, including significant improvements, is stated at
cost. Depreciation is computed using the straight-line method using estimated
useful lives of 3 to 20 years for support equipment and 10 to 40 years for
buildings and improvements.

  INTANGIBLE ASSETS

     Effective January 1, 2002, the Company adopted Statement 142. Statement 142
requires that goodwill and other intangible assets with indefinite useful lives
(collectively, "indefinite lived intangible assets") no longer be amortized, but
instead be tested for impairment at least annually in accordance with the
provisions of Statement 142. Equity method goodwill is also no longer amortized,
but continues to be considered for impairment under Accounting Principles Board
Opinion No. 18. Statement 142 also requires that intangible assets with
estimable useful lives be amortized over their respective estimated useful lives
to their estimated residual values, and reviewed for impairment in accordance
with Statement of Financial Accounting Standards No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets ("Statement 144").

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

     The Company determined the fair value of its reporting units using
independent appraisals, public trading prices and other means. The Company then
compared the fair value of each reporting unit to the reporting unit's carrying
amount. To the extent a reporting unit's carrying amount exceeded its fair
value, the Company performed the second step of the transitional impairment
test. In the second step, the Company compared the implied fair value of the
reporting unit's goodwill, determined by allocating the reporting unit's fair
value to all of its assets (recognized and unrecognized) and liabilities in a
manner similar to a purchase price allocation, to its carrying amount, both of
which were measured as of the date of adoption.

     In situations where the implied fair value of a reporting unit's goodwill
was less than its carrying value, Liberty recorded a transition impairment
charge. In total, the Company recognized a $1,869 million transitional
impairment loss, net of taxes of $127 million, as the cumulative effect of a
change in accounting principle in 2002. The foregoing transitional impairment
loss includes an adjustment of $325 million for the Company's proportionate
share of transition adjustments that its equity method affiliates recorded.

                                      II-42
<PAGE>
                   LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     As noted above, indefinite lived intangible assets are no longer amortized.
Adjusted net loss and loss per common share, exclusive of amortization expense
related to goodwill, franchise costs and equity method goodwill, for periods
prior to the adoption of Statement 142 are as follows (amounts in millions,
except per share amounts):

<Table>
<Caption>
                                                               YEAR ENDED
                                                              DECEMBER 31,
                                                                  2001
                                                              ------------
<S>                                                           <C>
Net loss, as reported.......................................    $(6,203)
Adjustments:
  Goodwill amortization.....................................        617
  Franchise costs amortization..............................         10
  Equity method excess costs amortization...................        798
  Income tax effect.........................................       (333)
                                                                -------
Net loss, as adjusted.......................................    $(5,111)
                                                                =======
Basic and diluted loss per common share, as reported........    $ (2.40)
Adjustments:
  Goodwill amortization.....................................        .24
  Franchise costs amortization..............................         --
  Equity method excess costs amortization...................        .31
  Income tax effect.........................................       (.13)
                                                                -------
Basic and diluted loss per common share, as adjusted........    $ (1.98)
                                                                =======
</Table>

     Amortization of intangible assets with finite useful lives was $285 million
and $191 million for the years ended December 31, 2003 and 2002, respectively.
Based on its current amortizable intangible assets, Liberty expects that
amortization expense will be as follows for the next five years (amounts in
millions):

<Table>
<S>                                                            <C>
2004........................................................   $489
2005........................................................   $468
2006........................................................   $424
2007........................................................   $395
2008........................................................   $363
</Table>

     Changes in the carrying amount of goodwill for the year ended December 31,
2003 are as follows:

<Table>
<Caption>
                                                     STARZ     ASCENT
                                                    ENCORE     MEDIA
                                       QVC, INC.   GROUP LLC   GROUP    OTHER(3)    TOTAL
                                       ---------   ---------   ------   --------   -------
                                                      (AMOUNTS IN MILLIONS)
<S>                                    <C>         <C>         <C>      <C>        <C>
Balance at December 31, 2002.........   $   --      $1,540      $327    $ 4,945    $ 6,812
  2003 acquisitions(1)...............    3,896          --        11         77      3,984
  Impairment of goodwill(2)..........       --        (157)       --     (1,195)    (1,352)
  Other..............................       (7)         --        --         --         (7)
                                        ------      ------      ----    -------    -------
Balance at December 31, 2003.........   $3,889      $1,383      $338    $ 3,827    $ 9,437
                                        ======      ======      ====    =======    =======
</Table>

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

(1) During the year ended December 31, 2003 and excluding the acquisition of
    QVC, Inc. ("QVC"), Liberty completed several small acquisitions for
    aggregate consideration of $167 million. In connection with these

                                      II-43
<PAGE>
                   LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

    acquisitions, Liberty recorded additional goodwill of $88 million, which
    represents the excess of the purchase price over the estimated fair value of
    tangible and identifiable intangible assets acquired.

(2) Starz Encore Group LLC ("Starz Encore") received an independent third party
    valuation in connection with its annual year-end evaluation of the
    recoverability of its goodwill. The result of this valuation, which was
    based on a discounted cash flow analysis of projections prepared by the
    management of Starz Encore, indicated that the fair value of this reporting
    unit was less than its carrying value including goodwill. This reporting
    unit fair value was then used to calculate an implied value of the goodwill
    (including $1,195 of allocated enterprise-level goodwill) related to Starz
    Encore. The $1,352 million excess of the carrying amount of the goodwill
    over its implied value has been recorded as an impairment charge in the
    fourth quarter of 2003. The reduction in the value of Starz Encore reflected
    in the third party valuation is believed to be attributable to a number of
    factors. Those factors include the reliance placed in that valuation on
    projections by management reflecting a lower rate of revenue growth compared
    to earlier projections based, among other things, on the possibility that
    revenue growth may be negatively affected by (1) a reduction in the rate of
    growth in total digital video subscribers and in the subscription video on
    demand business as a result of cable operators' increased focus on the
    marketing and sale of other services, such as high speed internet access and
    telephony, and the uncertainty as to the success of marketing efforts by
    distributors of Starz Encore's services and (2) lower per subscriber rates
    under the new affiliation agreement with Comcast, as compared to the
    payments required under the 1997 AT&T Broadband Affiliation Agreement
    (including the programming pass through provision).

(3) As noted above, the Company's enterprise-level goodwill is allocable to
    reporting units, whether they are consolidated subsidiaries or equity method
    investments. The following table summarizes these allocations at December
    31, 2003 (amounts in millions).

<Table>
<Caption>
                                                               ALLOCABLE
ENTITY                                                         GOODWILL
------                                                         ---------
<S>                                                            <C>
Discovery Communications, Inc...............................    $1,789
QVC.........................................................     1,231
Jupiter Telecommunications Co., Ltd.........................       203
Jupiter Programming.........................................       127
Courtroom Television Network, LLC...........................       125
Game Show Network, LLC......................................        17
Other.......................................................       335
                                                                ------
                                                                $3,827
                                                                ======
</Table>

     In August 2002, Liberty purchased 38% of the common equity and 85% of the
voting power of OpenTV Corp. ("OpenTV"), which when combined with Liberty's
previous ownership interest in OpenTV, brought Liberty's total ownership to 41%
of the equity and 86% of the voting power of OpenTV. During the period between
the execution of the purchase agreement in May 2002 and the consummation of the
acquisition in August 2002, OpenTV disclosed that it was lowering its revenue
and cash flow projections for 2002 and extending the time before it would be
cash flow positive. As a result, OpenTV wrote off all of its separately recorded
goodwill. In light of the announcement by OpenTV and the adverse impact on its
stock price, as well as other negative factors arising in its industry sector,
Liberty determined that the goodwill initially recorded in purchase accounting
($92 million) was not recoverable. This assessment is supported by an appraisal
performed by an independent third party. Accordingly, Liberty recorded an
impairment charge for the entire amount of the goodwill during the third quarter
of 2002.

                                      II-44
<PAGE>
                   LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     In addition to the goodwill impairment related to OpenTV, the Company
recorded 2002 impairments of $84 million related to Ascent Media and $99 million
primarily related to its equity method affiliates in South America.

  IMPAIRMENT OF LONG-LIVED ASSETS

     Statement 144 requires that the Company periodically review the carrying
amounts of its property and equipment and its intangible assets (other than
goodwill) to determine whether current events or circumstances indicate that
such carrying amounts may not be recoverable. If the carrying amount of the
asset is greater than the expected undiscounted cash flows to be generated by
such asset, an impairment adjustment is to be recognized. Such adjustment is
measured by the amount that the carrying value of such assets exceeds their fair
value. The Company generally measures fair value by considering sale prices for
similar assets or by discounting estimated future cash flows using an
appropriate discount rate. Considerable management judgment is necessary to
estimate the fair value of assets. Accordingly, actual results could vary
significantly from such estimates. Assets to be disposed of are carried at the
lower of their financial statement carrying amount or fair value less costs to
sell.

     As a result of the weakness in the economy in 2001 certain subsidiaries of
the Company did not meet their 2001 operating objectives and reduced their 2002
expectations. Accordingly, the subsidiaries assessed the recoverability of their
property and equipment and intangible assets and determined that impairment
adjustments were necessary. In addition, in the fourth quarter of 2001, a
subsidiary made the decision to consolidate its operations and close certain
facilities. In connection with these initiatives, the subsidiary recorded a
restructuring charge related to lease cancellation fees and an additional
impairment charge related to its property and equipment. All of the foregoing
charges are included in impairment of long-lived assets in the Company's
statement of operations.

  MINORITY INTERESTS

     Recognition of minority interests' share of losses of subsidiaries is
generally limited to the amount of such minority interests' allocable portion of
the common equity of those subsidiaries. Further, the minority interests' share
of losses is not recognized if the minority holders of common equity of
subsidiaries have the right to cause the Company to repurchase such holders'
common equity.

  FOREIGN CURRENCY TRANSLATION

     The functional currency of the Company is the United States ("U.S.")
dollar. The functional currency of the Company's foreign operations generally is
the applicable local currency for each foreign subsidiary and foreign equity
method investee. Assets and liabilities of foreign subsidiaries and foreign
equity investees are translated at the spot rate in effect at the applicable
reporting date, and the consolidated statements of operations and the Company's
share of the results of operations of its foreign equity affiliates are
translated at the average exchange rates in effect during the applicable period.
The resulting unrealized cumulative translation adjustment, net of applicable
income taxes, is recorded as a component of accumulated other comprehensive
earnings in 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 the accompanying consolidated statements of operations
and comprehensive loss as unrealized (based on the applicable period-end
exchange rate) or realized upon settlement of the transactions.

                                      II-45
<PAGE>
                   LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  REVENUE RECOGNITION

     Revenue is recognized as follows:

     - Revenue from electronic retail sales is recognized at the time of
       shipment to customers. An allowance for returned merchandise is provided
       as a percentage of sales based on historical experience. The total
       reduction in sales due to returns for the four months ended December 31,
       2003 aggregated $340 million.

     - Programming revenue is recognized in the period during which programming
       is provided, pursuant to affiliation agreements.

     - Advertising revenue is recognized, net of agency commissions, in the
       period during which underlying advertisements are broadcast.

     - Revenue from post-production services is recognized in the period the
       services are rendered.

     - Revenue from sales and licensing of software and related service and
       maintenance is recognized pursuant to Statement of Position No. 97-2
       "Software Revenue Recognition." For multiple element contracts with
       vendor specific objective evidence, the Company recognizes revenue for
       each specific element when the earnings process is complete. If vendor
       specific objective evidence does not exist, revenue is deferred and
       recognized on a straight-line basis over the term of the maintenance
       period.

     - Cable and other distribution revenue is recognized in the period that
       services are rendered. Cable installation revenue is recognized in the
       period the related services are provided to the extent of direct selling
       costs. Any remaining amount is deferred and recognized over the estimated
       average period that customers are expected to remain connected to the
       cable distribution system.

  COST OF SALES-ELECTRONIC RETAILING

     Cost of sales primarily includes actual product cost, provision for
obsolete inventory, buying allowances received from suppliers, shipping and
handling costs and warehouse costs.

  ADVERTISING COSTS

     Advertising costs generally are expensed as incurred. Advertising expense
aggregated $26 million, $43 million and $43 million for the years ended December
31, 2003, 2002 and 2001, respectively. Co-operative marketing costs are
recognized as advertising expense to the extent an identifiable benefit is
received and fair value of the benefit can be reasonably measured. Otherwise,
such costs are recorded as a reduction of revenue.

  STOCK BASED COMPENSATION

     As more fully described in note 13, the Company has granted to its
employees options, stock appreciation rights ("SARs") and options with tandem
SARs to purchase shares of Liberty Series A and Series B common stock. The
Company accounts for these grants pursuant to the recognition and measurement
provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB Opinion No. 25"). Under these provisions, options are
accounted for as fixed plan awards and no compensation expense is recognized
because the exercise price is equal to the market price of the underlying common
stock on the date of grant; whereas options with tandem SARs are accounted for
as variable plan awards unless there is a significant disincentive for employees
to exercise the SAR feature. Compensation for variable plan awards 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

                                      II-46
<PAGE>
                   LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Stock-Based Compensation," ("Statement 123") to its options. Compensation
expense for options with tandem SARs is the same under APB Opinion No. 25 and
Statement 123.

<Table>
<Caption>
                                                              YEARS ENDED DECEMBER 31,
                                                          ---------------------------------
                                                            2003        2002        2001
                                                          ---------   ---------   ---------
                                                          (AMOUNTS IN MILLIONS, EXCEPT PER
                                                                   SHARE AMOUNTS)
<S>                                                       <C>         <C>         <C>
Net loss................................................   $(1,222)    $(5,330)    $(6,203)
  Add stock compensation as determined under the
     intrinsic value method, net of taxes...............         5          --          --
  Deduct stock compensation as determined under the fair
     value method, net of taxes.........................       (56)        (79)       (129)
                                                           -------     -------     -------
Pro forma net loss......................................   $(1,273)    $(5,409)    $(6,332)
                                                           =======     =======     =======
Basic and diluted net loss per share:
  As reported...........................................   $  (.44)    $ (2.06)    $ (2.40)
  Pro forma.............................................   $  (.46)    $ (2.09)    $ (2.45)
</Table>

     Agreements that require Liberty to reacquire interests in subsidiaries held
by officers and employees in the future are marked-to-market at the end of each
reporting period with corresponding adjustments being recorded to stock
compensation expense.

  EARNINGS (LOSS) PER COMMON SHARE

     Basic earnings (loss) per common share is computed by dividing net earnings
(loss) by the number of common shares outstanding. The number of outstanding
common shares for periods prior to the Company's August 2001 split off from AT&T
Corp. is based upon the number of shares of Series A and Series B Liberty common
stock issued upon consummation of the Split Off Transaction. Diluted earnings
(loss) per common share presents the dilutive effect on a per share basis of
potential common shares as if they had been converted at the beginning of the
periods presented. Excluded from diluted earnings per share for the years ended
December 31, 2003, 2002 and 2001, are 84 million, 78 million and 76 million
potential common shares because their inclusion would be anti-dilutive.

  RECLASSIFICATIONS

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

  ESTIMATES

     The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America ("GAAP") requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual results
could differ from those estimates. Liberty considers the fair value of its
derivative instruments and its assessment of nontemporary declines in value of
its investments to be its most significant estimates.

     Liberty holds a significant number of investments that are accounted for
using the equity method. Liberty does not control the decision making process or
business management practices of these affiliates. Accordingly, Liberty relies
on management of these affiliates and their independent accountants to provide
it with accurate financial information prepared in accordance with GAAP that
Liberty uses in the application of the equity method. The Company is not aware,
however, of any errors in or possible misstatements of the

                                      II-47
<PAGE>
                   LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

financial information provided by its equity affiliates that would have a
material effect on Liberty's consolidated financial statements.

(3)  SUPPLEMENTAL DISCLOSURES TO CONSOLIDATED STATEMENTS OF CASH FLOWS

<Table>
<Caption>
                                                              YEARS ENDED DECEMBER 31,
                                                             --------------------------
                                                               2003      2002     2001
                                                             --------   ------   ------
                                                               (AMOUNTS IN MILLIONS)
<S>                                                          <C>        <C>      <C>
Cash paid for acquisitions:
  Fair value of assets acquired............................  $ 9,996    $ 424    $ 264
  Net liabilities assumed..................................     (968)     (57)    (136)
  Long term debt issued....................................   (4,000)      --       --
  Deferred tax liability...................................   (1,612)     (14)      (7)
  Minority interest........................................      (49)    (114)      (8)
  Common stock issued......................................   (2,656)    (195)      --
                                                             -------    -----    -----
     Cash paid for acquisitions, net of cash acquired......  $   711    $  44    $ 113
                                                             =======    =====    =====
Cash paid for interest.....................................  $   433    $ 426    $ 451
                                                             =======    =====    =====
Cash paid for income taxes.................................  $    62    $  --    $   9
                                                             =======    =====    =====
</Table>

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

     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 are held by members of the QVC management team.

     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

                                      II-48
<PAGE>
                   LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

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

<Table>
<S>                                                           <C>
Current assets, including cash and cash equivalents of $632
  million...................................................  $ 1,764
Property and equipment......................................      631
Intangible assets subject to amortization:
  Customer relationships(1).................................    2,336
  Cable and satellite television distribution rights(1).....    2,022
Intangible assets not subject to amortization:
  Trademarks................................................    2,385
  Goodwill..................................................    3,896
Other assets................................................      269
Liabilities.................................................     (888)
Minority interest...........................................     (101)
Deferred income taxes.......................................   (1,597)
                                                              -------
                                                              $10,717
                                                              =======
</Table>

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

(1) Customer relationships are being amortized over 10-14 years. Cable and
    satellite television distribution rights are being amortized primarily over
    14 years.

     The following unaudited pro forma information for Liberty and its
consolidated subsidiaries for the years ended December 31, 2003 and 2002 was
prepared assuming the acquisition of QVC occurred on January 1, 2002. These pro
forma amounts are not necessarily indicative of operating results that would
have occurred if the QVC acquisition had occurred on January 1, 2002.

<Table>
<Caption>
                                                               YEARS ENDED DECEMBER 31,
                                                              --------------------------
                                                                 2003            2002
                                                              ----------      ----------
                                                                (AMOUNTS IN MILLIONS,
                                                              EXCEPT PER SHARE AMOUNTS)
<S>                                                           <C>             <C>
Revenue.....................................................   $ 6,943         $ 6,465
Loss before cumulative effect of accounting change..........   $(1,175)        $(3,444)
Net loss....................................................   $(1,175)        $(5,313)
Loss per common share.......................................   $  (.41)        $ (1.89)
</Table>

                                      II-49
<PAGE>
                   LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

     Liberty has various investments accounted for using the equity method. The
following table includes Liberty's carrying amount and percentage ownership of
the more significant investments in affiliates at December 31, 2003 and the
carrying amount at December 31, 2002:

<Table>
<Caption>
                                                          DECEMBER 31,         DECEMBER 31,
                                                              2003                 2002
                                                     -----------------------   ------------
                                                      PERCENTAGE    CARRYING     CARRYING
                                                      OWNERSHIP      AMOUNT       AMOUNT
                                                     ------------   --------   ------------
                                                          (DOLLAR AMOUNTS IN MILLIONS)
<S>                                                  <C>            <C>        <C>
Discovery Communications, Inc. ("Discovery").......         50%      $2,864       $2,817
Jupiter Telecommunications Co., Ltd. ("J-COM").....         45%       1,331          782
QVC................................................          *           --        2,712
UnitedGlobalCom, Inc. ("UGC")......................         52%          --           --
Other..............................................    various        1,159        1,079
                                                                     ------       ------
                                                                     $5,354       $7,390
                                                                     ======       ======
</Table>

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

* A consolidated subsidiary since September 2003.

     The following table reflects Liberty's share of earnings (losses) of
affiliates including excess basis amortization in 2001 and nontemporary declines
in value:

<Table>
<Caption>
                                                              YEARS ENDED DECEMBER 31,
                                                             --------------------------
                                                              2003     2002      2001
                                                             ------   ------   --------
                                                               (AMOUNTS IN MILLIONS)
<S>                                                          <C>      <C>      <C>
Discovery..................................................  $  38    $ (32)   $  (293)
J-COM......................................................     20      (22)       (90)
QVC........................................................    107      154         36
UGC........................................................     --     (198)      (751)
Telewest Communications plc ("Telewest")...................     --      (92)    (2,538)
Cablevision S.A. ("Cablevision")...........................     --       --       (476)
ASTROLINK International LLC ("Astrolink")..................     --       (1)      (417)
Other......................................................   (107)    (262)      (377)
                                                             -----    -----    -------
                                                             $  58    $(453)   $(4,906)
                                                             =====    =====    =======
</Table>

  UGC

     UGC is a global broadband communications provider of video, voice and data
services with operations in over 25 countries throughout the world. On January
30, 2002, the Company and UGC completed a transaction (the "UGC Transaction")
pursuant to which UGC was formed to own UGC Holdings, Inc. ("UGC Holdings").
Upon consummation of the UGC Transaction, all shares of UGC Holdings common
stock were exchanged for shares of common stock of UGC. In addition, the Company
contributed (i) cash consideration of $200 million; (ii) a note receivable from
Belmarken Holding B.V., a subsidiary of UGC Holdings, with an accreted value of
$892 million and a carrying value of $496 million (the "Belmarken Loan") and
(iii) Senior Notes and Senior Discount Notes of United-Pan Europe Communications
N.V. ("UPC"), a subsidiary of UGC Holdings, with an aggregate carrying amount of
$270 million to UGC in exchange for 281.3 million shares of UGC Class C common
stock with a fair value of $1,406 million. Liberty has accounted for the UGC
Transaction as the acquisition of an additional noncontrolling interest in UGC
in exchange for monetary

                                      II-50
<PAGE>
                   LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

financial instruments. Accordingly, Liberty calculated a $440 million gain on
the transaction based on the difference between the estimated fair value of the
financial instruments and their carrying value. Due to its continuing indirect
ownership in the assets contributed to UGC, Liberty limited the amount of gain
it recognized to the minority shareholders' attributable share (approximately
28%) of such assets or $123 million (before deferred tax expense of $48
million).

     Because Liberty had no commitment to make additional capital contributions
to UGC, Liberty suspended recording its share of UGC's losses when its carrying
value was reduced to zero in 2002.

     At December 31, 2003, Liberty owned approximately 307 million shares of UGC
common stock, or an approximate 52% economic interest and a 90% voting interest
in UGC. The closing price of UGC's Class A common stock was $8.48 on December
31, 2003. Pursuant to certain voting and standstill arrangements, Liberty was
unable to exercise control of UGC, and accordingly, Liberty used the equity
method of accounting for its investment through December 31, 2003.

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

     On December 18, 2003, UGC completed its offer to exchange its Class A
common stock for the outstanding shares of UGC Europe common stock that it did
not already own. Upon completion of the exchange offer, UGC owned 92.7% of the
outstanding shares of UGC Europe common stock. On December 19, 2003, UGC
effected a "short-form" merger with UGC Europe. In the short-form merger, each
share of UGC Europe common stock not tendered in the exchange offer was
converted into the right to receive the same consideration offered in the
exchange offer, and UGC acquired the remaining 7.3% of UGC Europe. In connection
with UGC's acquisition of the minority interest in UGC Europe, Liberty
calculated a $680 million gain due to the dilutive effect on its investment in
UGC and the implied per share value of the exchange offer. However, as Liberty
had suspended recording losses of UGC in 2002 and these suspended losses
exceeded the aforementioned gain, Liberty did not recognized the gain in its
consolidated financial statements.

     On January 5, 2004, Liberty completed a transaction pursuant to which UGC's
founding shareholders (the "Founders") transferred 8.2 million shares of UGC
Class B common stock to Liberty in exchange for 12.6 million shares of Liberty
Series A common stock and a cash payment of approximately $13 million. Upon
closing of the transaction with the Founders, the restrictions on the exercise
by Liberty of its voting power with respect to UGC terminated, and Liberty
gained voting control of UGC. Accordingly, UGC will be included in Liberty's
consolidated financial position and results of operations beginning January
2004. Liberty has entered into a new Standstill Agreement with UGC that limits
Liberty's ownership of UGC common stock to 90 percent of the outstanding common
stock unless it makes an offer or effects another transaction to acquire all
outstanding UGC common stock. Under certain circumstances, such an offer or
transaction would require an independent appraisal to establish the price to be
paid to stockholders unaffiliated with Liberty.

     In January 2004, Liberty also purchased an additional 18.3 million shares
of UGC Class A common stock pursuant to certain pre-emptive rights granted to it
pursuant to a standstill agreement with UGC. The $140 million purchase price for
such shares was comprised of (1) the cancellation of indebtedness due from
subsidiaries of UGC to certain subsidiaries of Liberty in the amount of $104
million (including accrued interest) and (2) $36 million in cash.

     Also in January 2004, UGC initiated a rights offering pursuant to which
holders of each of UGC's Class A, Class B and Class C common stock received .28
transferable subscription rights to purchase a like
                                      II-51
<PAGE>
                   LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

class of common stock for each share of common stock owned by them on January
21, 2004. The rights offering originally expired on February 6, 2004, but was
subsequently extended to February 12, 2004. UGC received cash proceeds of
approximately $1.02 billion from the rights offering and expects to use such
cash proceeds for working capital and general corporate purposes, including
future acquisitions and repayment of outstanding indebtedness. As a holder of
UGC Class A, Class B and Class C common stock, Liberty participated in the
rights offering and exercised its rights to purchase 94.1 million shares for a
total cash purchase price of $565 million. Subsequent to the foregoing
transactions, Liberty owns approximately 55% of UGC's common stock representing
approximately 92% of the voting power of UGC's shares.

  TELEWEST

     Telewest operates cable television and telephone systems in the United
Kingdom, and develops and sells a variety of television programming also in the
U.K.

     Telewest has disclosed that it has reached an agreement in principle,
subject to certain conditions, relating to a restructuring of a significant
portion of its notes and debentures. The agreement provides for the cancellation
of all outstanding notes and debentures issued by Telewest and one of its
subsidiaries, as well as certain other unsecured foreign exchange contracts, in
exchange for new ordinary shares representing 98.5% of the issued share capital
of a new holding company immediately after the restructuring. Existing
shareholders will receive a 1.5% interest in the new holding company under the
proposed restructuring. As a result of Telewest's proposed restructuring, which
Liberty expects will reduce its ownership in Telewest to below 10%, Liberty
determined that beginning in 2003 it no longer has the ability to exercise
significant influence over the operations of Telewest. In addition, Liberty has
removed its representatives from the Telewest board of directors. Accordingly,
effective January 1, 2003, Liberty no longer accounts for its investment in
Telewest using the equity method.

     At December 31, 2003, Liberty's accumulated other comprehensive earnings
includes $287 million (before related deferred taxes) of unrealized foreign
currency losses related to its investment in the equity of Telewest. These
unrealized foreign currency losses will only be recognized by Liberty upon the
sale of its Telewest investment.

     During the year ended December 31, 2001, Liberty determined that its
investment in Telewest experienced a nontemporary decline in value. As a result,
the carrying value of Telewest was adjusted to its estimated fair value, and the
Company recognized a charge of $1,801 million. Such charge is included in share
of losses of affiliates.

  CABLEVISION

     Cablevision provides cable television and high speed data services in
Argentina. At December 31, 2003, the Company has a 39% economic ownership in
Cablevision. As a result of deteriorating economic conditions and the
devaluation of the Argentine peso, Cablevision recorded foreign currency
translation losses of $393 million in the fourth quarter of 2001. At December
31, 2001, the Company determined that its investment in Cablevision had
experienced a nontemporary decline in value, and accordingly, recorded an
impairment charge of $195 million. Such charge is included in share of losses of
affiliates. The Company's share of losses in 2001, when combined with foreign
currency translation losses recorded in other comprehensive loss at December 31,
2001, reduced the carrying value of its investment in Cablevision to zero as of
December 31, 2001. Included in accumulated other comprehensive earnings at
December 31, 2003 is $201 million (before related deferred taxes) of unrealized
foreign currency translation losses related to the Company's investment in
Cablevision. These unrealized foreign currency losses will only be recognized by
Liberty upon the sale of its Cablevision investment.

                                      II-52
<PAGE>
                   LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  ASTROLINK

     Astrolink originally intended to build a global telecom network using
Ka-band geostationary satellites to provide broadband data communications
services. Astrolink's original business plan required significant additional
financing over the next several years. During the fourth quarter of 2001, two of
the members of Astrolink informed Astrolink that they did not intend to provide
any of Astrolink's required financing. Based on an assessment of Astrolink's
remaining sources of liquidity and Astrolink's inability to obtain financing for
its business plan, the Company concluded that the carrying value of its
investment in Astrolink should be reduced to reflect a fair value that assumed
the liquidation of Astrolink. Accordingly, the Company wrote-off all of its
remaining investment in Astrolink during the fourth quarter of 2001. Including
such fourth quarter amount, the Company recorded losses and charges relating to
its investment in Astrolink aggregating $417 million during the year ended
December 31, 2001. As Liberty had no obligation to make additional contributions
to Astrolink, its share of losses in 2002 was limited to amounts advanced to
Astrolink by Liberty. Liberty sold its interest in Astrolink in the fourth
quarter of 2003 for cash proceeds of $5 million.

  OTHER

     In April 2002, Liberty sold its 40% interest in Telemundo Communications
Group for cash proceeds of $679 million, and recognized a gain of $344 million
(before related tax expense of $134 million) based upon the difference between
the cash proceeds and Liberty's basis in Telemundo, including allocated goodwill
of $25 million.

     During the years ended December 31, 2003, 2002 and 2001, Liberty recorded
nontemporary declines in fair value aggregating $84 million, $148 million and
$2,396 million, respectively, related to certain of its other equity method
investments. Such amounts are included in share of losses of affiliates.

                                      II-53
<PAGE>
                   LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

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

<Table>
<Caption>
                                                                   DECEMBER 31,
                                                              ----------------------
                                                                2003         2002
                                                              ---------    ---------
                                                              (AMOUNTS IN MILLIONS)
<S>                                                           <C>          <C>
The News Corporation ("News Corp.").........................   $ 7,633      $ 5,254
InterActiveCorp ("IAC").....................................     4,697        2,057
Time Warner Inc. ("Time Warner")............................     3,080        2,243
Sprint Corporation ("Sprint PCS")...........................     1,134          968
Motorola(1).................................................     1,068          660
Viacom, Inc. ("Viacom").....................................       674          619
Vivendi Universal ("Vivendi")...............................        --          604
Other AFS equity securities.................................       382          551
Other AFS debt securities(2)................................     1,207        1,302
Other cost investments and related receivables..............       339          218
                                                               -------      -------
                                                                20,214       14,476
  Less short-term investments...............................      (265)        (107)
                                                               -------      -------
                                                               $19,949      $14,369
                                                               =======      =======
</Table>

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

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

(2) At December 31, 2003, other available-for-sale securities include $493
    million of investments in certain third-party marketable debt securities
    held by Liberty parent and $26 million of such securities held by Liberty
    subsidiaries. At December 31, 2002, such investments aggregated $622 million
    and $49 million, respectively.

  NEWS CORP.

     During the year ended December 31, 2003, Liberty increased its economic and
voting interest in News Corp. Effective October 14, 2003, pursuant to a put/call
arrangement with News Corp., Liberty acquired $500 million of American
Depository Shares ("ADSs") for News Corp. preferred limited voting shares at
$21.50 per ADR. In addition during 2003, Liberty sold certain of its News Corp.
non-voting ADSs in the open market and purchased voting New Corp. ADSs in the
open market. Liberty recognized a gain of $236 million (before related tax
expense of $92 million) on the sale of its non-voting ADSs. Subsequent to
December 31, 2003, Liberty purchased additional voting ADSs and sold additional
non-voting ADSs in the open market. Subsequent to these transactions, Liberty
owns 210.8 million non-voting News Corp. ADSs and 48 million voting ADSs. On a
net basis, Liberty effectively exchanged 21.2 million non-voting ADSs and $693
million in cash for the 48 million voting ADSs, taking into account proceeds
from sales of, and unwinding of collars on, non-voting News Corp. ADSs.

     In May 2001, Liberty consummated a transaction with News Corp. whereby
Liberty exchanged 70.7 million shares of Gemstar-TV Guide International, Inc.
("Gemstar") for 121.5 million News Corp. ADSs. Included in losses on
dispositions in the accompanying consolidated statement of operations for the
year ended December 31, 2001 is a loss of $764 million recognized in connection
with this transaction based on the difference between the fair value of the
securities received by Liberty and the carrying value of the

                                      II-54
<PAGE>
                   LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Gemstar shares. In December 2001, Liberty exchanged its remaining Gemstar shares
for 28.8 million additional News Corp. ADSs and recorded an additional loss of
$201 million. Liberty accounts for its investment in News Corp. as an
available-for-sale security.

  VIVENDI AND INTERACTIVECORP

     Prior to May 7, 2002, Liberty held 74.4 million shares of IAC's common
stock and shares and other equity interests in certain subsidiaries of IAC that
were exchangeable for an aggregate of 79.0 million shares of IAC common stock.
On an "as-converted basis," Liberty owned an approximate 20% voting interest in
IAC and applied the equity method of accounting for its investment. IAC owned
and operated businesses in television production, electronic retailing,
ticketing operations and Internet services.

     On May 7, 2002, Liberty, IAC, and Vivendi consummated the following
transactions. Liberty exchanged 7.1 million shares of USANi LLC (a subsidiary of
IAC) for a like number of shares of IAC common stock. Vivendi then acquired from
Liberty 25 million shares of IAC common stock, approximately 38.7 million shares
of USANi LLC, and Liberty's approximate 30% interest in multiThematiques S.A.,
together with certain liabilities with respect thereto, in exchange for 37.4
million Vivendi ordinary shares, which at the date of the transaction had an
aggregate fair value of $1,013 million. Liberty recognized a loss of $817
million based on the difference between the fair value of the Vivendi shares
received and the carrying value of the assets relinquished, including goodwill
of $514 million which was allocated to the reporting unit holding the IAC
interests. Following this exchange, IAC contributed substantially all of its
entertainment assets to Vivendi Universal Entertainment ("VUE"), a partnership
controlled by Vivendi, in exchange for, among other consideration, common and
preferred interests in VUE. After this contribution, Liberty exchanged its
remaining equity interests in subsidiaries of IAC for 33.2 million shares of
common stock of IAC.

     During the year ended December 31, 2003 and pursuant to contractual
pre-emptive rights, Liberty acquired an aggregate 48.7 million shares of IAC for
cash consideration of $1,166 million. At December 31, 2003, Liberty owns
approximately 20% of IAC common stock representing an approximate 47% voting
interest. However, due to certain governance arrangements which limit its
ability to exert significant influence over IAC, Liberty accounts for such
investment as an available-for-sale security. Liberty also owned approximately
3% of Vivendi and accounted for such investment as an available-for-sale
security. During the fourth quarter of 2003, Liberty sold all of its shares of
Vivendi common stock in the open market for aggregate cash proceeds of $838
million and recognized a $262 million gain (before tax expense of $102 million).

  TIME WARNER

     On January 11, 2001, America Online, Inc. completed its merger with Time
Warner to form AOL Time Warner (now known as Time Warner Inc.). In connection
with the merger, each share of Time Warner common stock held by Liberty was
converted into 1.5 shares of an identical series of AOL Time Warner stock.
Liberty recognized a $253 million gain (before deferred tax expense of $100
million) based upon the difference between the carrying value of Liberty's
interest in Time Warner and the fair value of the AOL Time Warner securities
received.

  VIACOM

     On January 23, 2001, BET Holdings II, Inc. ("BET") was acquired by Viacom
in exchange for shares of Class B common stock of Viacom. As a result of the
merger, Liberty received 15.2 million shares of Viacom's Class B common stock
(less than 1% of Viacom's common equity) in exchange for its 35% ownership
interest in BET, which investment had been accounted for using the equity
method. Liberty accounts for its investment in Viacom as an available-for-sale
security. Liberty recognized a gain of $559 million (before deferred tax expense
of $221 million) in 2001 based upon the difference between the carrying value of
Liberty's interest in BET and the value of the Viacom securities received.
                                      II-55
<PAGE>
                   LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  NONTEMPORARY DECLINES IN FAIR VALUE OF INVESTMENTS

     During the years ended December 31, 2003, 2002 and 2001, Liberty determined
that certain of its AFS Securities and cost investments experienced nontemporary
declines in value. The primary factors considered by Liberty in determining the
timing of the recognition for the majority of these impairments was the length
of time the investments traded below Liberty's cost bases and the lack of
near-term prospects for recovery in the stock prices. As a result, the carrying
amounts of such investments were adjusted to their respective fair values based
primarily on quoted market prices at the balance sheet date. These adjustments
are reflected as nontemporary declines in fair value of investments in the
consolidated statements of operations.

     The following table identifies the realized losses attributable to each of
the individual investments as follows:

<Table>
<Caption>
                                                              YEARS ENDED DECEMBER 31,
                                                              -------------------------
INVESTMENT                                                    2003     2002      2001
----------                                                    -----   -------   -------
                                                                (AMOUNTS IN MILLIONS)
<S>                                                           <C>     <C>       <C>
Time Warner.................................................   $--    $2,567    $2,052
News Corp...................................................    --     1,393       915
Sprint PCS..................................................    --     1,077        --
Vivendi.....................................................    --       409        --
Others......................................................    29       607     1,134
                                                               ---    ------    ------
                                                               $29    $6,053    $4,101
                                                               ===    ======    ======
</Table>

  UNREALIZED HOLDINGS 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.

<Table>
<Caption>
                                                   DECEMBER 31, 2003         DECEMBER 31, 2002
                                                -----------------------   -----------------------
                                                  EQUITY        DEBT        EQUITY        DEBT
                                                SECURITIES   SECURITIES   SECURITIES   SECURITIES
                                                ----------   ----------   ----------   ----------
                                                              (AMOUNTS IN MILLIONS)
<S>                                             <C>          <C>          <C>          <C>
Gross unrealized holding gains................    $5,779        $212        $1,357        $77
Gross unrealized holding losses...............    $   --        $ --        $  (87)       $--
</Table>

     Management estimates that the fair market value of all of its other cost
investments approximated $497 million and $342 million at December 31, 2003 and
2002, respectively. Management calculates market values of its other cost
investments using a variety of approaches including multiple of cash flow, per
subscriber value, or a value of comparable public or private businesses. No
independent appraisals were conducted for those cost investment assets.

                                      II-56
<PAGE>
                   LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(7)  DERIVATIVE INSTRUMENTS

     The Company's derivative instruments are summarized as follows:

<Table>
<Caption>
                                                                  DECEMBER 31,
TYPE OF                                                       ---------------------
DERIVATIVE                                                      2003        2002
----------                                                    --------    ---------
                                                              (AMOUNTS IN MILLIONS)
<S>                                                           <C>         <C>
ASSETS
  Equity collars(1).........................................   $3,358      $ 5,014
  Put spread collars........................................      331          478
  Other.....................................................      124           65
                                                               ------      -------
     Total..................................................    3,813        5,557
  Less current portion......................................     (543)      (1,165)
                                                               ------      -------
                                                               $3,270      $ 4,392
                                                               ======      =======


LIABILITIES
  Exchangeable debenture call option obligations............   $  990      $   536
  Put options...............................................      774          929
  Equity collars............................................      293           --
  Borrowed shares...........................................      533           --
  Other.....................................................       41           23
                                                               ------      -------
     Total..................................................    2,631        1,488
  Less current portion......................................     (875)         (19)
                                                               ------      -------
                                                               $1,756      $ 1,469
                                                               ======      =======
</Table>

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

(1) Includes narrow-band collars.

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

     The Company has entered into equity collars, narrow-band collars, put
spread collars, written put options and other financial instruments to manage
market risk associated with its investments in certain marketable securities.
These instruments are recorded at fair value based on option pricing models.
Equity collars provide the Company with a put option that gives the Company the
right to require the counterparty to purchase a specified number of shares of
the underlying security at a specified price (the "Company Put Price") at a
specified date in the future. Equity collars also provide the counterparty with
a call option that gives the counterparty the right to purchase the same
securities at a specified price at a specified date in the future. The put
option and the call option generally are equally priced at the time of
origination resulting in no cash receipts or payments. Narrow-band collars are
equity collars in which the put and call prices are set so that the call option
has a relatively higher fair value than the put option at the time of
origination. In these cases the Company receives cash equal to the difference
between such fair values.

     Put spread collars provide the Company 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 the
Company to purchase the underlying securities at a price that is lower than the
Company Put Price. The inclusion of the secondary put option allows the Company
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 the Company
to market risk if the underlying security trades below the put spread price.

                                      II-57
<PAGE>
                   LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  EXCHANGEABLE DEBENTURE CALL OPTION OBLIGATIONS

     Liberty has issued senior exchangeable debentures which are exchangeable
for the value of a specified number of shares of Sprint PCS Group common stock,
Motorola common stock, Viacom Class B common stock or Time Warner common stock,
as applicable. (See note 9 for a more complete description of the exchangeable
debentures.)

     Prior to the adoption of Statement 133, the exchangeable debenture call
option feature and the long-term debt were reported together in the Company's
consolidated balance sheet. Under Statement 133, the call option feature of the
exchangeable debentures is reported separately in the consolidated balance sheet
at fair value. Accordingly, at January 1, 2001, Liberty recorded a transition
adjustment to reflect the call option obligations at fair value ($459 million)
and to recognize in net earnings the difference between the fair value of the
call option obligations at issuance and the fair value of the call option
obligations at January 1, 2001. Such adjustment to net earnings aggregated $757
million (before tax expense of $299 million) and is included in cumulative
effect of accounting change. Changes in the fair value of the call option
obligations subsequent to January 1, 2001 are recognized as unrealized gains
(losses) on derivative instruments in Liberty's consolidated statements of
operations.

  REALIZED AND UNREALIZED GAINS ON DERIVATIVE INSTRUMENTS

     Realized and unrealized gains (losses) on derivative instruments during the
years ended December 31, 2003, 2002 and 2001 are comprised of the following:

<Table>
<Caption>
                                                            YEARS ENDED DECEMBER 31,
                                                            -------------------------
                                                            2003     2002      2001
                                                            -----   -------   -------
                                                              (AMOUNTS IN MILLIONS)
<S>                                                         <C>     <C>       <C>
Change in fair value of exchangeable debenture call option
  feature.................................................  $(158)  $   784   $   167
Change in fair value of hedged AFS Securities.............     --    (2,378)   (1,531)
Change in fair value of AFS derivatives...................   (535)    3,665     1,177
Change in fair value of other derivatives(1)..............     44        51        13
                                                            -----   -------   -------
  Total realized and unrealized gains (losses), net.......  $(649)  $ 2,122   $  (174)
                                                            =====   =======   =======
</Table>

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

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

(8)  AT&T OWNERSHIP OF LIBERTY

     On March 9, 1999, AT&T Corp. ("AT&T") acquired Tele-Communications, Inc.
("TCI"), the former parent company of Liberty, in a merger transaction (the
"AT&T Merger").

     From March 9, 1999 through August 9, 2001, AT&T owned 100% of the
outstanding common stock of Liberty. During such time, the AT&T Class A Liberty
Media Group common stock and the AT&T Class B Liberty Media Group common stock
were tracking stocks of AT&T designed to reflect the economic performance of the
businesses and assets of AT&T attributed to the Liberty Media Group, which was
comprised of the businesses and assets of Liberty and its subsidiaries.

     Effective August 10, 2001, AT&T effected the split-off of Liberty pursuant
to which Liberty's common stock was recapitalized, and each outstanding share of
AT&T Liberty Media Group tracking stock was redeemed for one share of Liberty
common stock (the "Split Off Transaction"). Subsequent to the Split Off
Transaction which was accounted for at historical cost, Liberty is no longer a
subsidiary of AT&T.

     In connection with the Split Off Transaction, Liberty was also
deconsolidated from AT&T for federal income tax purposes. Pursuant to an
agreement entered into at the time of the AT&T Merger, AT&T was

                                      II-58
<PAGE>
                   LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

required to pay Liberty an amount equal to 35% of the amount of the net
operating loss carryforward reflected in TCI's final federal income tax return
that had not been used as an offset to Liberty's obligations under a tax sharing
agreement and that had been, or was reasonably expected to be, utilized by AT&T.
The $803 million payment was received by Liberty prior to the Split Off
Transaction and has been reflected as an increase to additional paid-in-capital
in the accompanying consolidated statement of stockholders' equity. In addition,
certain deferred intercompany gains were includible in AT&T's taxable income as
a result of the Split Off Transaction, and AT&T was entitled to reimbursement
from Liberty for the resulting tax liability of approximately $115 million. Such
tax liability has been reflected as a reduction in additional paid-in-capital in
the accompanying consolidated statement of stockholders' equity.

(9)  LONG-TERM DEBT

     Debt is summarized as follows:

<Table>
<Caption>
                                                      WEIGHTED AVERAGE    DECEMBER 31,
                                                       INTEREST RATE     ---------------
                                                            2003          2003     2002
                                                      ----------------   ------   ------
                                                            (AMOUNTS IN MILLIONS)
<S>                                                   <C>                <C>      <C>
Parent company debt:
  Senior notes......................................         4.29%       $5,627   $  983
  Senior debentures.................................         8.33%        1,487    1,486
  Senior exchangeable debentures....................         1.84%        2,227      865
  Bank debt.........................................                         --      325
                                                                         ------   ------
                                                                          9,341    3,659
Debt of subsidiaries:
  Bank credit facilities............................      Various           143    1,242
  Other debt, at varying rates......................                        115       70
                                                                         ------   ------
                                                                            258    1,312
                                                                         ------   ------
  Total debt........................................                      9,599    4,971
Less current maturities.............................                       (117)    (655)
                                                                         ------   ------
  Total long-term debt..............................                     $9,482   $4,316
                                                                         ======   ======
</Table>

  SENIOR NOTES AND DEBENTURES

     In September 2003, Liberty issued $1,350 million principal amount of 3.5%
senior notes due 2006 for net cash proceeds of $1,347 million. Liberty used the
proceeds from this offering to partially finance its purchase of Comcast's
interest in QVC. See note 4.

     Also as part of the consideration for QVC, Liberty issued $4,000 million of
Floating Rate Notes due 2006 to Comcast. The Floating Rate Notes accrue interest
at LIBOR plus a margin. The margin on the $2,500 million principal amount of
Floating Rate Notes sold by Comcast on September 24, 2003 is fixed at 1.5%. On
September 24, 2003 and December 12, 2003, Liberty repurchased from subsidiaries
of Comcast $500 million and $1,000 million, respectively, principal amount of
the Floating Rate Notes at a purchase price equal to 100% of the principal
amount plus accrued interest.

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

                                      II-59
<PAGE>
                   LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     In prior years, Liberty issued $750 million of 7 7/8% Senior Notes due
2009, $237.8 million of 7 3/4% Senior Notes due 2009, $500 million of 8 1/2%
Senior Debentures due 2029, and $1 billion of 8 1/4% Senior Debentures due 2030.
Interest on these obligations is payable semi-annually.

     The senior notes and senior debentures are stated net of an aggregate
unamortized discount of $24 million and $19 million at December 31, 2003 and
2002, respectively, which is being amortized to interest expense in the
accompanying consolidated statements of operations.

  SENIOR EXCHANGEABLE DEBENTURES

     In November 1999, Liberty issued $869 million of 4% Senior Exchangeable
Debentures due 2029. Each $1,000 debenture is exchangeable at the holder's
option for the value of 22.9486 shares of Sprint PCS Group stock. After the date
Liberty's ownership level of Sprint PCS Group common stock falls below 10%,
Liberty may, at its election, pay the exchange value in cash, Sprint PCS Group
stock or a combination thereof. Prior to such time, the exchange value must be
paid in cash. Liberty's ownership in Sprint PCS was approximately 17% at
December 31, 2003. Liberty, at its option, may redeem the debentures, in whole
or in part, for cash.

     In February and March 2000, Liberty issued an aggregate of $810 million of
3 3/4% Senior Exchangeable Debentures due 2030. Each $1,000 debenture is
exchangeable at the holder's option for the value of 16.7764 shares of Sprint
PCS Group stock. After the date Liberty's ownership level of Sprint PCS Group
stock falls below 10%, Liberty may, at its election, pay the exchange value in
cash, Sprint PCS Group stock or a combination thereof. Prior to such time, the
exchange value must be paid in cash. Liberty, at its option, may redeem the
debentures, in whole or in part, for cash.

     In January 2001, Liberty issued $600 million of 3 1/2% Senior Exchangeable
Debentures due 2031. Each $1,000 debenture is exchangeable at the holder's
option for the value of 36.8189 shares of Motorola common stock. Such exchange
value is payable, at Liberty's option, in cash, Motorola stock or a combination
thereof. On or after January 15, 2006, Liberty, at its option, may redeem the
debentures, in whole or in part, for cash.

     In March 2001, Liberty issued $817.7 million of 3 1/4% Senior Exchangeable
Debentures due 2031. Each $1,000 debenture is exchangeable at the holder's
option for the value of 18.5666 shares of Viacom Class B common stock. After
January 23, 2003, such exchange value is payable at Liberty's option in cash,
Viacom stock or a combination thereof. Prior to such date, the exchange value
must be paid in cash. On or after March 15, 2006, Liberty, at its option, may
redeem the debentures, in whole or in part, for cash.

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

     Interest on the Company's exchangeable debentures is payable semi-annually
based on the date of issuance. At maturity, all of the Company's exchangeable
debentures are payable in cash.

     In accordance with Statement 133, the call option feature of the
exchangeable debentures is reported at fair value and separately from the
long-term debt in the consolidated balance sheet.

     The reported amount of the long-term debt portion of the exchangeable
debentures is calculated as the difference between the face amount of the
debentures and the fair value of the call option feature on the date of
issuance. The fair value of the call option obligations related to the $1,750
million of exchangeable
                                      II-60
<PAGE>
                   LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

debentures issued during the year ended December 31, 2003, aggregated $406
million on the date of issuance. Accordingly, the long-term debt portion was
recorded at $1,344 million. The long-term debt is accreted to its face amount
over the expected term of the debenture using the effective interest method.
Accretion related to all of the Company's exchangeable debentures aggregated $61
million, $7 million and $6 million during the years ended December 31, 2003,
2002 and 2001, respectively, and is included in interest expense in the
accompanying consolidated statements of operations.

  SUBSIDIARY BANK CREDIT FACILITIES

     At December 31, 2003, Starz Encore had no amounts outstanding and $325
million available pursuant to its bank credit facility. The bank credit facility
contains restrictive covenants which require, among other things, the
maintenance of certain financial ratios, and include limitations on
indebtedness, liens, encumbrances, acquisitions, dispositions, guarantees and
dividends. Additionally, the bank credit facility requires the payment of fees
of .2% per annum on the average unborrowed portion of the total commitment. Such
fees were not significant in 2003, 2002 and 2001. Starz Encore's ability to
borrow the unused capacity noted above is dependent on its continuing compliance
with its covenants at the time of, and after giving effect to, a requested
borrowing.

     At December 31, 2003, the subsidiary of Liberty that operates the DMX Music
service was not in compliance with three covenants contained in its bank loan
agreement. The subsidiary and the participating banks have entered into a
forbearance agreement whereby the banks have agreed to forbear from exercising
certain default-related remedies against the subsidiary through March 31, 2004.
The subsidiary will not be able to repay its debt when the forbearance agreement
expires and is currently considering its financing options. The outstanding
balance of the subsidiary's bank facility was $89 million at December 31, 2003,
all of which is included in current portion of debt. All other consolidated
borrowers were in compliance with their debt covenants at December 31, 2003.

  FIVE YEAR MATURITIES

     The U.S. dollar equivalent of the annual maturities of Liberty's debt for
each of the next five years is as follows (amounts in millions):

<Table>
<S>                                                            <C>
2004........................................................   $  117
2005........................................................   $   24
2006........................................................   $3,660
2007........................................................   $   11
2008........................................................   $1,759
</Table>

  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 at December 31, 2003 is as follows (amounts in millions):

<Table>
<S>                                                            <C>
Fixed rate senior notes.....................................   $2,198
Floating Rate Notes.........................................   $2,500
Senior debentures...........................................   $1,805
Senior exchangeable debentures, including call option
  liability.................................................   $4,368
</Table>

     Liberty believes that the carrying amount of its subsidiary debt
approximated fair value at December 31, 2003.

                                      II-61
<PAGE>
                   LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

<Table>
<S>                                                            <C>
Carrying value at December 31, 2003.........................   $ 9,599
Add:
  Unamortized issue discount on senior notes and
     debentures.............................................        24
  Unamortized discount attributable to call option feature
     of exchangeable debentures.............................     2,411
                                                               -------
     Face amount at maturity................................   $12,034
                                                               =======
</Table>

(10)  INCOME TAXES

     During the period from March 9, 1999 to August 10, 2001, Liberty was
included in the consolidated federal income tax return of AT&T and was a party
to a tax sharing agreement with AT&T (the "AT&T Tax Sharing Agreement"). Liberty
calculated its respective tax liability on a separate return basis. The income
tax provision for Liberty was calculated based on the increase or decrease in
the tax liability of the AT&T consolidated group resulting from the inclusion of
those items in the consolidated tax return of AT&T which were attributable to
Liberty.

     Under the AT&T Tax Sharing Agreement, Liberty received a cash payment from
AT&T in periods when Liberty generated taxable losses and such taxable losses
were utilized by AT&T to reduce the consolidated income tax liability. This
utilization of taxable losses was accounted for by Liberty as a current federal
intercompany income tax benefit. To the extent such losses were not utilized by
AT&T, such amounts were available to reduce federal taxable income generated by
Liberty in future periods, similar to a net operating loss carryforward, and
were accounted for as a deferred federal income tax benefit. During the period
from March 10, 1999 to December 31, 2002, Liberty received cash payments from
AT&T aggregating $555 million as payment for Liberty's taxable losses that AT&T
utilized to reduce its income tax liability. In the event AT&T generates
ordinary losses in 2003 or capital losses in 2003 or 2004 and is able to carry
back such losses to offset taxable income previously offset by Liberty's losses,
Liberty may be required to refund as much as $333 million of these cash
payments.

     Income tax benefit (expense) consists of:

<Table>
<Caption>
                                                               YEARS ENDED DECEMBER 31,
                                                              --------------------------
                                                               2003     2002      2001
                                                              ------   -------   -------
                                                                (AMOUNTS IN MILLIONS)
<S>                                                           <C>      <C>       <C>
Current:
  Federal...................................................  $  10    $   (7)   $  296
  State and local...........................................    (30)       (1)       (2)
  Foreign...................................................    (42)       (1)        1
                                                              -----    ------    ------
                                                                (62)       (9)      295
                                                              -----    ------    ------
Deferred:
  Federal...................................................   (251)    1,449     3,166
  State and local...........................................    (52)      259       444
  Foreign...................................................     (9)        3         3
                                                              -----    ------    ------
                                                               (312)    1,711     3,613
                                                              -----    ------    ------
Income tax benefit (expense)................................  $(374)   $1,702    $3,908
                                                              =====    ======    ======
</Table>

                                      II-62
<PAGE>
                   LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Income tax benefit (expense) differs from the amounts computed by applying
the U.S. federal income tax rate of 35% as a result of the following:

<Table>
<Caption>
                                                               YEARS ENDED DECEMBER 31,
                                                              --------------------------
                                                               2003     2002      2001
                                                              ------   -------   -------
                                                                (AMOUNTS IN MILLIONS)
<S>                                                           <C>      <C>       <C>
Computed expected tax benefit...............................  $ 298    $1,820    $3,809
Impairment charges and amortization of goodwill not
  deductible for income tax purposes........................   (477)      (90)     (260)
Disposition of nondeductible goodwill in sales
  transactions..............................................     --      (185)       --
State and local income taxes, net of federal income taxes...    (51)      169       289
Foreign taxes...............................................    (46)       (8)       13
Change in valuation allowance affecting tax expense.........    (65)      (13)      (70)
Adjustments to dividend received deduction..................    (21)       16        17
Effect of change in estimated state tax rate................     --        --        91
Other, net..................................................    (12)       (7)       19
                                                              -----    ------    ------
Income tax benefit (expense)................................  $(374)   $1,702    $3,908
                                                              =====    ======    ======
</Table>

     The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
2003 and 2002 are presented below:

<Table>
<Caption>
                                                                   DECEMBER 31,
                                                              ----------------------
                                                                2003          2002
                                                              ---------     --------
                                                              (AMOUNTS IN MILLIONS)
<S>                                                           <C>           <C>
Deferred tax assets:
  Net operating and capital loss carryforwards..............   $   830       $  635
  Accrued stock compensation................................       102          265
  Other future deductible amounts...........................       143           16
                                                               -------       ------
     Deferred tax assets....................................     1,075          916
  Valuation allowance.......................................      (386)        (363)
                                                               -------       ------
     Net deferred tax assets................................       689          553
                                                               -------       ------
Deferred tax liabilities:
  Investments...............................................     7,235        6,057
  Intangible assets.........................................     2,664          120
  Discount on exchangeable debentures.......................       849          803
  Other.....................................................       191           38
                                                               -------       ------
     Deferred tax liabilities...............................    10,939        7,018
                                                               -------       ------
Net deferred tax liabilities................................   $10,250       $6,465
                                                               =======       ======
</Table>

     The Company's valuation allowance increased $23 million in 2003, including
a $65 million charge to tax expense partially offset by a $42 million reversal
of valuation allowance recorded in connection with acquisitions.

     At December 31, 2003, Liberty had net operating and capital loss
carryforwards for income tax purposes aggregating approximately $2,304 million
which, if not utilized to reduce taxable income in future periods, will expire
as follows: 2004: $1 million; 2005: $14 million; 2006: $51 million; 2007: $78
million; 2008: $12 million;

                                      II-63
<PAGE>
                   LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

2009: $64 million; 2010: $5 million; and beyond 2010: $2,079 million. Of the
foregoing net operating and capital loss carryforward amount, approximately
$1,281 million is subject to certain limitations and may not be currently
utilized. The remaining $1,023 million is currently available to be utilized to
offset future taxable income of Liberty's consolidated tax group.

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

(11)  STOCKHOLDERS' EQUITY

  PREFERRED STOCK

     Liberty's preferred stock is issuable, from time to time, with such
designations, preferences and relative participating, option or other special
rights, qualifications, limitations or restrictions thereof, as shall be stated
and expressed in a resolution or resolutions providing for the issue of such
preferred stock adopted by Liberty's Board of Directors. As of December 31,
2003, no shares of preferred stock were issued.

  COMMON STOCK

     The Series A common stock has one vote per share, and the Series B common
stock has ten votes per share. Each share of the Series B common stock is
exchangeable at the option of the holder for one share of Series A common stock.

     As of December 31, 2003, there were 56 million shares of Liberty Series A
common stock and 28 million shares of Liberty Series B common stock reserved for
issuance under exercise privileges of outstanding stock options and warrants.

  PURCHASES OF COMMON STOCK

     During the years ended December 31, 2003 and 2002, the Company purchased
42.3 million and 25.7 million shares of its common stock for aggregate cash
consideration of $437 million and $281 million, respectively. These purchases
have been accounted for as retirements of common stock and have been reflected
as a reduction of stockholders' equity in the accompanying consolidated balance
sheet.

     During 2002, Liberty sold put options on 7.0 million shares of its Series A
common stock, 4.0 million of which were outstanding at December 31, 2002.
Liberty sold another 9.3 million put options in the first quarter of 2003. All
of these options expired unexercised prior to December 31, 2003. The Company
accounted for these put options pursuant to EITF 00-19, "Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock" and recorded a net increase to additional paid-in-capital
of $37 million during the year ended December 31, 2003.

(12)  TRANSACTIONS WITH OFFICERS AND DIRECTORS

  CHAIRMAN'S EMPLOYMENT AGREEMENT

     In connection with the AT&T Merger, an employment agreement between the
Company's Chairman and TCI was assigned to the Company.

                                      II-64
<PAGE>
                   LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The Chairman's employment agreement provides for, among other things,
deferral of a portion (not in excess of 40%) of the monthly compensation payable
to him for all employment years commencing on or after January 1, 1993. The
deferred amounts will be payable in monthly installments over a 20-year period
commencing on the termination of the Chairman's employment, together with
interest thereon at the rate of 8% per annum compounded annually from the date
of deferral to the date of payment. The aggregate liability under this
arrangement at December 31, 2003 is $1.6 million, and is included in other
liabilities in the accompanying consolidated balance sheet.

     The Chairman's employment agreement also provides that in the event of
termination of his employment with Liberty, he will be entitled to receive 240
consecutive monthly payments equal to $15,000 increased at the rate of 12% per
annum compounded annually from January 1, 1988 to the date payment commences
($82,103 per month as of December 31, 2003). Such payments would commence on the
first day of the month succeeding the termination of employment. In the event of
the Chairman's death, his beneficiaries would be entitled to receive the
foregoing monthly payments. The aggregate liability under this arrangement at
December 31, 2003 is $19.7 million, and is included in other liabilities in the
accompanying consolidated balance sheet.

     The Company's Chairman deferred a portion of his monthly compensation under
his previous employment agreement with TCI. The Company assumed the obligation
to pay that deferred compensation in connection with the AT&T Merger. The
deferred obligation (together with interest at the rate of 13% per annum
compounded annually), which aggregated $10.9 million at December 31, 2003 and is
included in other liabilities, is payable on a monthly basis, following the
occurrence of specified events, under the terms of the previous employment
agreement. The rate at which interest accrues on the deferred obligation was
established in 1983 pursuant to the previous employment agreement.

  OTHER

     Effective November 28, 2003, Liberty acquired all the outstanding stock of
TP Investment, Inc. ("TPI"), a corporation wholly owned by TP-JCM, LLC, a
limited liability company in which the sole member is the Company's Chairman. In
exchange for the stock of TPI, TP-JCM received 5,281,739 shares of the Company's
Series B common stock, valued in the agreement at $11.50 per share. As
prescribed by the Agreement and Plan of Merger pursuant to which the acquisition
was effected, that per share value equals 110% of the average of the closing
sale prices of the Company's Series A Common Stock for the ten trading days
ended November 28, 2003. TPI owns 10,602 shares of Series B Preferred Stock of
Liberty TP Management, Inc. ("Liberty TP Management"), a subsidiary of the
Company. Those shares of Series B Preferred Stock represent 12% of the voting
power of Liberty TP Management. TPI also owns a 5% membership interest
(representing a 50% voting interest) in Liberty TP LLC, a limited liability
company which owns approximately 20.6% of the common equity and 27.2% of the
voting power of Liberty TP Management. As a result of the acquisition, the
Company beneficially owns all the equity and voting interests in Liberty TP
Management. Liberty TP Management owns our interest in True Position and certain
equity interests in Sprint PCS Group, IDT Investments, Inc. and priceline.com.

     In connection with the acquisition of TPI, the Company entered into a
registration rights agreement. That agreement provides for the registration by
the Company under applicable federal and state securities laws, at the holder's
request, of the sale of shares of the Company's Series A Common Stock issuable
upon conversion of shares of the Series B Common Stock that were issued to
TP-JCM.

     The shares of Series B Common Stock issued to TP-JCM are subject to the
Company's rights to purchase such shares pursuant to a call agreement entered
into in February 1998 by the chairman and his spouse. Pursuant to the call
agreement, Liberty has the right to acquire all of the Series B Liberty common
stock held by the Chairman and his spouse in certain circumstances. The price of
acquiring such shares is generally limited to the market price of the Series A
Liberty common stock, plus a 10% premium.
                                      II-65
<PAGE>
                   LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     During the second quarter of 2001, Liberty purchased 2,245,155 shares of
common stock of On Command Corporation ("On Command"), a consolidated subsidiary
of Liberty, from the Chairman and Chief Executive Officer of On Command, who at
the time was also a director of Liberty, for aggregate cash consideration of
$25.2 million. Such purchase price represents a per share price of $11.22. The
closing market price for On Command common stock on the day the transaction was
signed was $7.77. The Company has included the difference between the aggregate
market value of the shares purchased and the cash consideration paid in selling,
general and administrative expenses in the accompanying consolidated statement
of operations.

     In August 2000, On Command sold shares of its Series A Convertible
Participating Preferred Stock (the "Preferred Shares") to a former director of
Liberty, who was also the Chairman and Chief Executive Officer of On Command,
for a $21 million note. The Preferred Shares are convertible into 236,250 shares
of Liberty Series A common stock. The note is secured by the Preferred Shares or
the proceeds from the sale of such shares and the former director's personal
obligations under such loan are limited. The note, which matures on August 1,
2005, may not be prepaid and interest on the note accrues at a rate of 7% per
annum. This arrangement has been treated as a fixed plan option for accounting
purposes.

(13)  STOCK OPTIONS AND STOCK APPRECIATION RIGHTS

  LIBERTY

     Effective with the Split Off Transaction, Liberty assumed from AT&T the
Amended and Restated AT&T Corp. Liberty Media Group 2000 Incentive Plan and
renamed it the Liberty Media Corporation 2000 Incentive Plan (the "Liberty
Incentive Plan"). Grants by TCI to current and former Liberty employees of
options and options with tandem SARs with respect to shares of Liberty Media
Group stock prior to 1999 were assumed by Liberty under the Liberty Incentive
Plan. Grants of free standing SARs made under the Plan in 2000 and in 2001 prior
to the Split Off Transaction were converted into options upon assumption by
Liberty.

     The Liberty Incentive Plan provides for awards to be made in respect of a
maximum of 160 million shares of common stock of Liberty. Awards may be made as
grants of stock options, SARs, restricted shares, stock units, cash or any
combination of the foregoing.

     Effective February 28, 2001 (the "Effective Date"), the Company
restructured the options and options with tandem SARs to purchase AT&T common
stock and AT&T Liberty Media Group tracking stock (collectively the
"Restructured Options") held by certain executive officers of the Company.
Pursuant to such restructuring, all Restructured Options became exercisable on
the Effective Date, and each executive officer was given the choice to exercise
all of his Restructured Options. Each executive officer who opted to exercise
his Restructured Options received consideration equal to the excess of the
closing price of the subject securities on the Effective Date over the exercise
price. The exercising officers received (i) a combination of cash and AT&T
Liberty Media Group tracking stock for Restructured Options that were vested
prior to the Effective Date and (ii) cash for Restructured Options that were
previously unvested. The executive officers used the cash proceeds from the
previously unvested options to purchase restricted shares of AT&T Liberty Media
Group tracking stock which were converted into shares of Liberty common stock
upon completion of the Split Off Transaction. Such restricted shares vested
according to a schedule that corresponded to the vesting schedule applicable to
the previously unvested options. As of December 31, 2003, all of the restricted
shares were vested.

     In addition, each executive officer was granted free-standing SARs equal to
the total number of Restructured Options exercised. The free-standing SARs were
tied to the value of AT&T Liberty Media Group tracking stock and will vest as to
30% in year one and 17.5% in years two through five. The free-standing SARs were
granted with an exercise price of $14.70 ($15.35 in the case of Liberty Series B
options)

                                      II-66
<PAGE>
                   LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

and had a fair value of $9.56 on the date of the grant. Upon completion of the
Split Off Transaction, the free-standing SARs automatically converted to options
to purchase Liberty Series A common stock (and in some cases Liberty Series B
common stock). Prior to the Effective Date, the Restructured Options were
accounted for using variable plan accounting pursuant to APB Opinion No. 25.
Accordingly, the above-described transaction did not have a significant impact
on Liberty's results of operations.

     In addition to the SARs issued in the aforementioned option restructuring,
during 2001 and pursuant to the Liberty Incentive Plan, Liberty awarded
2,104,000 options to purchase Liberty Series A common stock to certain officers
and key employees of the Company. Such options have a 10-year term, exercise
prices ranging from $12.40 to $16.35, vest as to 25% in each of years 2 through
5 after the date of grant, and had a weighted-average grant date fair value of
$9.40.

     During the first quarter of 2002, the Company reduced the exercise price of
2.3 million stock options previously granted to three executive officers from a
weighted average exercise price of $21.66 to $14.70, which new exercise price
exceeded the closing market price of Liberty Series A common stock on the date
of repricing. As a result of such repricing, these options are now accounted for
as variable plan awards. Options held by Liberty's Chairman, Chief Executive
Officer and Chief Operating Officer were not included in the foregoing
repricing.

     In connection with the Company's Rights Offering, which expired on December
2, 2002, and pursuant to the Liberty Incentive Plan antidilution provisions, the
number of shares and the applicable exercise prices of all Liberty options
granted pursuant to the Liberty Incentive Plan were adjusted as of October 31,
2002, the record date for the Rights Offering. As a result of the foregoing
modifications, all of the Company's outstanding options are now accounted for as
variable plan awards.

     During the year ended December 31, 2003, Liberty awarded 6,167,000 free
standing SARs to its officers and employees. Such SARs have a 10-year term,
exercise prices ranging from $11.09 to $14.33, vest as to 20% on each of the
first five anniversaries of the respective grant date, and had a weighted
average grant date fair value of $5.57 per share.

     On December 17, 2002, shareholders of the Company approved the Liberty
Media Corporation 2002 Nonemployee Director Incentive Plan (the "NDIP"). Under
the NDIP, the Liberty Board of Directors (the "Liberty Board") has the full
power and authority to grant eligible nonemployee directors stock options, SARs,
stock options with tandem SARs, and restricted stock. Effective September 9,
2003, the Liberty Board granted each nonemployee director of Liberty 11,000 free
standing SARs at an exercise price of $11.85. These options expire 10 years from
the date of grant, vest on the first anniversary of the grant date and had a
grant date fair value of $5.93 per share.

     The estimated fair values of the options noted above are based on the
Black-Scholes model and are stated in current annualized dollars on a present
value basis. The key assumptions used in the model for purposes of these
calculations generally include the following: (a) a discount rate equal to the
10-year Treasury rate on the

                                      II-67
<PAGE>
                   LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

date of grant; (b) a 32% volatility factor; (c) the 10-year option term; (d) the
closing price of the respective common stock on the date of grant; and (e) an
expected dividend rate of zero.

     The following table presents the number and weighted average exercise price
("WAEP") of certain options, SARs and options with tandem SARs to purchase
Liberty Series A and Series B common stock granted to certain officers,
employees and directors of the Company.

<Table>
<Caption>
                                                   LIBERTY             LIBERTY
                                                   SERIES A            SERIES B
                                                    COMMON              COMMON
                                                    STOCK      WAEP     STOCK      WAEP
                                                   --------   ------   --------   ------
                                                     (NUMBERS OF OPTIONS IN THOUSANDS)
<S>                                                <C>        <C>      <C>        <C>
Outstanding at January 1, 2001...................   77,516    $ 7.20        --
  Granted........................................   21,625    $14.72    27,462    $15.35
  Exercised......................................  (50,315)   $ 7.62        --
  Canceled.......................................   (1,167)   $16.88        --
                                                   -------              ------
Outstanding at December 31, 2001.................   47,659    $11.69    27,462    $15.35
  Granted........................................      525    $12.38        --
  Exercised......................................     (488)   $ 3.51        --
  Canceled.......................................     (995)   $25.70        --
  Options issued in mergers......................      744    $34.55        --
  Adjustments pursuant to antidilution
     provisions..................................    1,216                 703
                                                   -------              ------
Outstanding at December 31, 2002.................   48,661    $ 9.60    28,165    $14.96
  Granted........................................    6,233    $11.88        --
  Exercised......................................     (323)   $ 4.68        --
  Canceled.......................................     (619)   $17.22        --
  Options issued in mergers......................    1,142    $78.53        --
                                                   -------              ------
Outstanding at December 31, 2003.................   55,094    $11.23    28,165    $14.96
                                                   =======              ======
Exercisable at December 31, 2001.................   23,494    $ 4.66        --
                                                   =======              ======
Exercisable at December 31, 2002.................   30,402    $ 6.78     8,450    $14.96
                                                   =======              ======
Exercisable at December 31, 2003.................   34,529    $ 9.12    13,378    $14.96
                                                   =======              ======
Vesting period...................................    5 yrs               5 yrs
</Table>

     The following table provides additional information about the Company's
outstanding options to purchase Liberty Series A common stock at December 31,
2003.

<Table>
<Caption>
  NO. OF                                        WEIGHTED      NO. OF
OUTSTANDING                         WAEP OF      AVERAGE    EXERCISABLE     WAEP OF
  OPTIONS     RANGE OF EXERCISE   OUTSTANDING   REMAINING     OPTIONS     EXERCISABLE
  (000'S)          PRICES           OPTIONS       LIFE        (000'S)       OPTIONS
-----------   -----------------   -----------   ---------   -----------   -----------
<S>           <C>                 <C>           <C>         <C>           <C>
    17,356     $   1.06-$4.07       $ 1.97      2.0 years     17,356        $ 1.97
     1,007     $   6.14-$9.70       $ 6.91      3.3 years      1,007        $ 6.91
    34,776     $ 10.53-$14.37       $13.56      7.3 years     14,822        $13.61
       470     $ 15.69-$15.95       $15.89      6.1 years        347        $15.88
     1,485     $21.88-$305.25       $66.27      6.3 years        997        $66.73
 ---------                                                    ------
    55,094                                                    34,529
 =========                                                    ======
</Table>

                                      II-68
<PAGE>
                   LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  JUNIOR STOCK PLANS

     In July 2001, Liberty LWR, Inc. ("LWR"), a wholly-owned subsidiary of
Liberty, formed Liberty Livewire Holdings, Inc. ("Livewire Holdings") as a
wholly owned subsidiary. LWR then sold to certain officers and a director of
Liberty an aggregate 19.872% common stock interest in Livewire Holdings with an
aggregate value of $600. Liberty, LWR and these individuals entered into a
stockholders agreement pursuant to which the individuals could require Liberty
to purchase, after five years, all or part of their common stock interest in
Livewire Holdings, in exchange for Liberty common stock, at its then-fair market
value. In addition, Liberty had the right to purchase, in exchange for its
common stock, their common stock interests in Livewire Holdings for fair market
value at any time. Effective May 9, 2003, all of the assets of Livewire Holdings
were distributed to LWR as the holder of all of the preferred stock interest in
Livewire Holdings, and Livewire Holdings was dissolved.

     In September 2000, certain officers of Liberty purchased a 6% common stock
interest in a subsidiary for $1.3 million. Such subsidiary owns an indirect
interest in an entity that holds certain of Liberty's investments in satellite
and technology related assets. Liberty and the officers entered into a
shareholders agreement in which the officers could require Liberty to purchase,
after five years, all or part of their common stock interest in exchange for
Series A Liberty common stock at the then fair market value. The shareholders
agreement also provides that upon termination of employment, Liberty will
repurchase the officers' interest for the original purchase price plus 6%. In
addition, Liberty has the right to purchase, in exchange for Series A Liberty
common stock, the common stock interests held by the officers at fair market
value at any time. During 2001, two of the officers resigned their positions
with the Company, and the Company purchased their respective interests in the
subsidiary pursuant to the terms of the agreement. No compensation related to
this stock plan was recognized by Liberty in 2003, 2002 or 2001.

     In May 2000, Liberty's President and Chief Executive Officer, certain
officers of a subsidiary and another individual purchased an aggregate 20%
common stock interest in a subsidiary for $800,000. This subsidiary owns a 7%
interest in J-COM. Liberty and the individuals entered into a shareholders
agreement in which the individuals could require Liberty to purchase, after five
years, all or part of their common stock interest in exchange for Series A
Liberty common stock at its then fair market value. In addition, Liberty has the
right to purchase, in exchange for Series A Liberty common stock, the common
stock interests held by the officers at fair market value at any time. Liberty
recognized $1 million, less than $1 million, and $4 million of compensation
expense related to changes in the market value of its contingent liability to
reacquire the common stock interests held by these officers during the years
ended December 31, 2003, 2002 and 2001, respectively.

  QVC

     QVC has a qualified and nonqualified combination stock option/stock
appreciation rights plan (collectively, the "Tandem Plan") for employees,
officers, directors and other persons designated by the Stock Option Committee
of QVC's board of directors. Under the Tandem Plan, the option price is
generally equal to the fair market value, as determined by an independent
appraisal, of a share of the underlying common stock of QVC at the date of the
grant. The fair value of a share of QVC common stock as of the latest valuation
date is $2,270. If the eligible participant elects the SAR feature of the Tandem
Plan, the participant receives 75% of the excess of the fair market value of a
share of QVC common stock over the exercise price of the option to which it is
attached at the exercise date. The holders of a majority of the outstanding
options have stated an intention not to exercise the SAR feature of the Tandem
Plan. Because the exercise of the option component is more likely than the
exercise of the SAR feature, compensation expense is measured based on the stock
option component. As a result, QVC is applying fixed plan accounting in
accordance with APB Opinion No. 25. Under the Tandem Plan, option/SAR terms are
ten years from the date of grant, with options/SARs generally becoming
exercisable over four years from the date of grant. At December 31, 2003, there
were a

                                      II-69
<PAGE>
                   LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

total of 142,671 options outstanding, 41,632 of which were vested at a weighted
average exercise price of $957.44 and 101,039 of which were unvested at a
weighted average exercise price of $1,523.21.

     In the fourth quarter of 2003, Liberty granted to certain officers and
employees of QVC a total of 10,098,978 restricted shares of Liberty Series A
common stock. Such shares vest as to 33% on each of January 1, 2005, 2006 and
2007. These shares had a grant date fair value of $10.08 per share.

  STARZ ENCORE

     Starz Encore has granted Phantom Stock Appreciation Rights ("PSARS") to
certain of its officers and employees, including its chief executive officer,
under this plan. PSARS granted under the plan generally vest over a five year
period. Substantially all of these PSARs are fully vested as of December 31,
2003. Compensation under the PSARS is computed based upon the percentage of
PSARS that are vested and a formula derived from the appraised fair value of the
net assets of Starz Encore. All amounts earned under the plan are payable in
cash, Liberty common stock or a combination thereof. At December 31, 2003 the
amount accrued pursuant to this plan was $94 million.

     Effective December 27, 2002, the chief executive officer of Starz Encore
elected to exercise 54% of his outstanding PSARS. In July 2003, Starz Encore
satisfied the amount due the officer with a cash payment of $287 million.

  OTHER

     Certain of the Company's subsidiaries have stock based compensation plans
under which employees and non-employees are granted options or similar stock
based awards. Awards made under these plans vest and become exercisable over
various terms. The awards and compensation recorded, if any, under these plans
is not significant to Liberty.

(14)  EMPLOYEE BENEFIT PLANS

     Liberty is the sponsor of the Liberty Media 401(k) Savings Plan (the
"Liberty 401(k) Plan"), which provides its employees and the employees of
certain of its subsidiaries an opportunity for ownership in the Company and
creates a retirement fund. The Liberty 401(k) Plan provides for employees to
make contributions to a trust for investment in Liberty common stock, as well as
several mutual funds. The Company and its subsidiaries make matching
contributions to the Liberty 401(k) Plan based on a percentage of the amount
contributed by employees. In addition, certain of the Company's subsidiaries
have their own employee benefit plans. Employer cash contributions to all plans
aggregated $16 million, $10 million and $10 million for the years ended December
31, 2003, 2002 and 2001, respectively.

                                      II-70
<PAGE>
                   LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(15)  OTHER COMPREHENSIVE EARNINGS (LOSS)

     Accumulated other comprehensive earnings (loss) included in Liberty's
consolidated balance sheets and consolidated statements of stockholders' equity
reflect the aggregate of foreign currency translation adjustments and unrealized
holding gains and losses on AFS Securities. The change in the components of
accumulated other comprehensive earnings (loss), net of taxes, is summarized as
follows:

<Table>
<Caption>
                                                                                ACCUMULATED
                                                 FOREIGN       UNREALIZED          OTHER
                                                CURRENCY     HOLDING GAINS     COMPREHENSIVE
                                               TRANSLATION    (LOSSES) ON     EARNINGS (LOSS),
                                               ADJUSTMENTS     SECURITIES       NET OF TAXES
                                               -----------   --------------   ----------------
                                                            (AMOUNTS IN MILLIONS)
<S>                                            <C>           <C>              <C>
Balance at January 1, 2001...................     $(142)         $ (255)           $ (397)
Other comprehensive earnings (loss)..........      (357)          1,594             1,237
                                                  -----          ------            ------
Balance at December 31, 2001.................      (499)          1,339               840
Other comprehensive loss.....................      (101)           (513)             (614)
                                                  -----          ------            ------
Balance at December 31, 2002.................      (600)            826               226
Other comprehensive earnings.................       149           2,826             2,975
Other activity...............................         1              (1)               --
                                                  -----          ------            ------
Balance at December 31, 2003.................     $(450)         $3,651            $3,201
                                                  =====          ======            ======
</Table>

     The components of other comprehensive earnings (loss) are reflected in
Liberty's consolidated statements of comprehensive earnings (loss) net of taxes.
The following table summarizes the tax effects related to each component of
other comprehensive earnings/loss.

<Table>
<Caption>
                                                                      TAX
                                                      BEFORE-TAX   (EXPENSE)   NET-OF-TAX
                                                        AMOUNT      BENEFIT      AMOUNT
                                                      ----------   ---------   ----------
                                                             (AMOUNTS IN MILLIONS)
<S>                                                   <C>          <C>         <C>
Year ended December 31, 2003:
Foreign currency translation adjustments............   $   244      $   (95)    $   149
Unrealized holding gains on securities arising
  during period.....................................     5,662       (2,208)      3,454
Reclassification adjustment for gains realized in
  net loss..........................................    (1,030)         402        (628)
                                                       -------      -------     -------
Other comprehensive earnings........................   $ 4,876      $(1,901)    $ 2,975
                                                       =======      =======     =======
Year ended December 31, 2002:
Foreign currency translation adjustments............   $  (166)     $    65     $  (101)
Unrealized holding losses on securities arising
  during period.....................................    (6,739)       2,628      (4,111)
Reclassification adjustment for losses realized in
  net loss..........................................     5,898       (2,300)      3,598
                                                       -------      -------     -------
Other comprehensive loss............................   $(1,007)     $   393     $  (614)
                                                       =======      =======     =======
Year ended December 31, 2001:
Foreign currency translation adjustments............   $  (585)     $   228     $  (357)
Unrealized holding losses on securities arising
  during period.....................................    (1,661)         648      (1,013)
Reclassification adjustment for losses realized in
  net loss..........................................     4,416       (1,722)      2,694
Cumulative effect of accounting change..............      (143)          56         (87)
                                                       -------      -------     -------
Other comprehensive earnings........................   $ 2,027      $  (790)    $ 1,237
                                                       =======      =======     =======
</Table>

                                      II-71
<PAGE>
                   LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(16)  TRANSACTIONS WITH AT&T AND OTHER RELATED PARTIES

     Subsidiaries of Liberty provide services to various equity affiliates of
Liberty, including Discovery Communications. Total revenue recognized by Liberty
subsidiaries for such services aggregated $19 million, $6 million and $17
million for the years ended December 31, 2003, 2002 and 2001, respectively.

     Certain subsidiaries of Liberty produce and/or distribute programming and
other services to cable distribution operators (including AT&T) and others
pursuant to long term affiliation agreements. Charges to AT&T were based upon
customary rates charged to others. Amounts included in revenue for services
provided to AT&T prior to the Split Off Transaction were $210 million for the
seven months ended July 31, 2001.

     Prior to the Split Off Transaction, AT&T allocated certain corporate
general and administrative costs to Liberty pursuant to an intergroup agreement.
Management believes such allocation methods were reasonable and materially
approximated the amount that Liberty would have incurred on a stand-alone basis.
In addition, there were arrangements between subsidiaries of Liberty and AT&T
and its other subsidiaries for satellite transponder services, marketing
support, programming, and hosting services. These expenses aggregated $20
million during the seven months ended July 31, 2001 (the period immediately
prior to the Split Off Transaction) and are included in operating and SG&A
expenses in the accompanying consolidated statement of operations.

(17)  COMMITMENTS AND CONTINGENCIES

  FILM RIGHTS

     Starz Encore, a wholly-owned subsidiary of Liberty, provides premium video
programming distributed by cable operators, direct-to-home satellite providers
and other distributors throughout the United States. Starz Encore has entered
into agreements with a number of motion picture producers which obligate Starz
Encore to pay fees for the rights to exhibit certain films that are released by
these producers. The unpaid balance under agreements for film rights related to
films that were available to Starz Encore at December 31, 2003 is reflected as a
liability in the accompanying consolidated balance sheet. The balance due as of
December 31, 2003 is payable as follows: $177 million in 2004 and $48 million in
2005.

     Starz Encore has also contracted to pay fees for the rights to exhibit
films that have been released theatrically, but are not available for exhibition
by Starz Encore until some future date. These amounts have not been accrued at
December 31, 2003. Starz Encore's estimate of amounts payable under these
agreements is as follows: $558 million in 2004; $231 million in 2005; $140
million in 2006; $112 million in 2007; $108 million in 2008; and $233 million
thereafter.

     Starz Encore is also obligated to pay fees for films that are released by
certain producers through 2010 when these films meet certain criteria described
in the studio output agreements. The actual contractual amount to be paid under
these agreements is not known at this time. However, such amounts are expected
to be significant. Starz Encore's total film rights expense aggregated $398
million, $358 million and $354 million for the years ended December 31, 2003,
2002 and 2001, respectively.

     In addition to the foregoing contractual film obligations, two motion
picture studios that have output contracts with Starz Encore through 2006 and
2010, respectively, have the right to extend their contracts for an additional
three years. If the first studio elects to extend its contract, Starz Encore has
agreed to pay the studio $60 million within five days of the studio's notice to
extend. The studio is required to exercise its option by December 31, 2004. If
the second studio elects to extend its contract, Starz Encore has agreed to pay
the studio a total of $190 million in four annual installments. The studio is
required to exercise this option by December 31, 2007. If made, Starz Encore's
payments to the studios would be amortized ratably over the term of the
respective output agreement extension.

                                      II-72
<PAGE>
                   LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  GUARANTEES

     Liberty guarantees Starz Encore's obligations under certain of its studio
output agreements. At December 31, 2003, Liberty's guarantee for obligations for
films released by such date aggregated $799 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 December 31, 2003, Liberty has guaranteed Y14.4 billion ($134 million)
of the bank debt of J-COM, an equity affiliate that provides broadband services
in Japan. Liberty's guarantees expire as the underlying debt matures and is
repaid. The debt maturity dates range from 2004 to 2018. In addition, Liberty
has agreed to fund up to an additional Y10 billion ($93 million at December 31,
2003) to J-COM in the event J-COM's cash flow (as defined in its bank loan
agreement) does not meet certain targets. In the event J-COM meets certain
performance criteria, this commitment expires on September 30, 2004.

     Liberty has guaranteed various leases, loans, notes payable, letters of
credit and other obligations (the "Guaranteed Obligations") of certain other
affiliates. At December 31, 2003, the Guaranteed Obligations aggregated
approximately $160 million and are not reflected in Liberty's consolidated
balance sheet at December 31, 2003. Currently, Liberty is not certain of the
likelihood of being required to perform under such guarantees.

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

  OPERATING LEASES

     Liberty leases business offices, has entered into pole rental and
transponder lease agreements and uses certain equipment under lease
arrangements. Rental expense under such arrangements amounted to $74 million,
$69 million and $76 million for the years ended December 31, 2003, 2002 and
2001, respectively.

     A summary of future minimum lease payments under noncancelable operating
leases as of December 31, 2003 follows (amounts in millions):

<Table>
<S>                                                            <C>
Years ending December 31:
  2004......................................................   $ 82
  2005......................................................   $ 67
  2006......................................................   $ 55
  2007......................................................   $ 44
  2008......................................................   $ 34
  Thereafter................................................   $120
</Table>

                                      II-73
<PAGE>
                   LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     It is expected that in the normal course of business, leases that expire
generally will be renewed or replaced by leases on other properties; thus, it is
anticipated that future minimum lease commitments will not be less than the
amount shown for 2003.

  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
consolidated financial statements.

(18)  INFORMATION ABOUT LIBERTY'S OPERATING SEGMENTS

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

     Liberty identifies its reportable segments as (A) those consolidated
subsidiaries that (1) represent 10% or more of its consolidated revenue,
earnings before income taxes or total assets or (2) are significant to an
evaluation of the performance of a Group; and (B) those equity method affiliates
(1) whose share of earnings represent 10% or more of Liberty's pre-tax earnings
or (2) are significant to an evaluation of the performance of a Group. The
segment presentation for prior periods has been conformed to the current period
segment presentation. Liberty evaluates performance and makes decisions about
allocating resources to its Groups and operating segments based on financial
measures such as revenue, operating cash flow, gross margin, and revenue or
sales per customer equivalent. In addition, Liberty reviews non-financial
measures such as average prime time rating, prime time audience delivery,
subscriber growth and penetration, as appropriate.

     Liberty defines operating cash flow as revenue less cost of sales,
operating expenses, and selling, general and administrative expenses (excluding
stock compensation). Liberty believes this is an important indicator of the
operational strength and performance of its businesses, including the ability to
service debt and fund capital expenditures. In addition, this measure allows
management to view operating results and perform analytical comparisons and
benchmarking between businesses and identify strategies to improve performance.
This measure of performance excludes depreciation and amortization, stock
compensation and restructuring and impairment charges that are included in the
measurement of operating income pursuant to GAAP. Accordingly, operating cash
flow should be considered in addition to, but not as a substitute for, operating
income, net income, cash flow provided by operating activities and other
measures of financial performance prepared in accordance with GAAP. Liberty
generally accounts for intersegment sales and transfers as if the sales or
transfers were to third parties, that is, at current prices.

     For the year ended December 31, 2003, 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 US 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.

                                      II-74
<PAGE>
                   LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

  INTERNATIONAL GROUP

     - UGC -- 52% owned equity method affiliate that provides broadband
       communications services, including video, voice and data with operations
       in over 25 countries.

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

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

  NETWORKS GROUP

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

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

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

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

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

     The amounts presented below represent 100% of each business' revenue,
operating cash flow and operating income. 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, 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.

                                      II-75
<PAGE>
                   LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  PERFORMANCE MEASURES

<Table>
<Caption>
                                                      YEARS ENDED DECEMBER 31,
                                   ---------------------------------------------------------------
                                          2003                  2002                  2001
                                   -------------------   -------------------   -------------------
                                             OPERATING             OPERATING             OPERATING
                                   REVENUE   CASH FLOW   REVENUE   CASH FLOW   REVENUE   CASH FLOW
                                   -------   ---------   -------   ---------   -------   ---------
                                                        (AMOUNTS IN MILLIONS)
<S>                                <C>       <C>         <C>       <C>         <C>       <C>
INTERACTIVE GROUP
QVC..............................  $ 4,889    $ 1,013    $ 4,362     $ 861     $ 3,894     $ 722
Ascent Media.....................      508         75        538        87         593        89
Other consolidated
  subsidiaries...................      317        (13)       256       (26)        239       (13)
Equity method affiliates.........       88        (20)       138       (91)         --        --
                                   -------    -------    -------     -----     -------     -----
  Combined Interactive Group.....    5,802      1,055      5,294       831       4,726       798
Eliminate equity method
  affiliates.....................   (3,004)      (561)    (4,500)     (770)     (3,894)     (722)
                                   -------    -------    -------     -----     -------     -----
  Consolidated Interactive
     Group.......................    2,798        494        794        61         832        76
                                   -------    -------    -------     -----     -------     -----
INTERNATIONAL GROUP
Consolidated subsidiaries........  $   107    $    27    $   100     $  26     $   138     $  42
UGC..............................    1,892        629      1,515       296       1,562      (191)
J-COM............................    1,233        429        931       211         629        57
JPC..............................      412         54        274        32         207        19
Other equity method affiliates...      614         91        568        87         854        61
                                   -------    -------    -------     -----     -------     -----
  Combined International Group...    4,258      1,230      3,388       652       3,390       (12)
Eliminate equity method
  affiliates.....................   (4,151)    (1,203)    (3,288)     (626)     (3,252)       54
                                   -------    -------    -------     -----     -------     -----
  Consolidated International
     Group.......................      107         27        100        26         138        42
                                   -------    -------    -------     -----     -------     -----
NETWORKS GROUP
Starz Encore.....................  $   906    $   368    $   945     $ 371     $   863     $ 313
Discovery........................    1,995        508      1,717       379       1,517       286
Court TV.........................      193         44        148        (1)        118        (3)
GSN..............................       76          1         53       (11)         37       (17)
Other consolidated
  subsidiaries...................      208         13        200         3         167        14
                                   -------    -------    -------     -----     -------     -----
  Combined Networks Group........    3,378        934      3,063       741       2,702       593
Eliminate equity method
  affiliates.....................   (2,264)      (553)    (1,918)     (367)     (1,672)     (266)
                                   -------    -------    -------     -----     -------     -----
  Consolidated Networks Group....    1,114        381      1,145       374       1,030       327
                                   -------    -------    -------     -----     -------     -----
Corporate and Other..............        9        (70)        45       (37)         59       (68)
                                   -------    -------    -------     -----     -------     -----
Consolidated Liberty.............  $ 4,028    $   832    $ 2,084     $ 424     $ 2,059     $ 377
                                   =======    =======    =======     =====     =======     =====
</Table>

                                      II-76
<PAGE>
                   LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  BALANCE SHEET INFORMATION

<Table>
<Caption>
                                                               DECEMBER 31,
                                            ---------------------------------------------------
                                                      2003                       2002
                                            ------------------------   ------------------------
                                             TOTAL      INVESTMENTS     TOTAL      INVESTMENTS
                                             ASSETS    IN AFFILIATES    ASSETS    IN AFFILIATES
                                            --------   -------------   --------   -------------
                                                           (AMOUNTS IN MILLIONS)
<S>                                         <C>        <C>             <C>        <C>
INTERACTIVE GROUP
QVC.......................................  $ 13,806       $   77      $  2,886       $   --
Ascent Media..............................       741            4           778            4
Other consolidated subsidiaries...........       592           --           704           --
Equity method affiliates..................       548           --           176           --
                                            --------       ------      --------       ------
  Combined Interactive Group..............    15,687           81         4,544            4
Eliminate equity method affiliates........      (548)          --        (3,062)          --
                                            --------       ------      --------       ------
  Consolidated Interactive Group..........    15,139           81         1,482            4
                                            --------       ------      --------       ------
INTERNATIONAL GROUP
Consolidated subsidiaries.................  $    406       $   --      $    388       $   --
UGC.......................................     7,100           95         5,932          154
J-COM.....................................     3,926            7         3,485            3
JPC.......................................       192           24           132           12
Other equity method affiliates............     1,756           12         1,184            7
                                            --------       ------      --------       ------
  Combined International Group............    13,380          138        11,121          176
Eliminate equity method affiliates........   (12,974)        (138)      (10,733)        (176)
                                            --------       ------      --------       ------
  Consolidated International Group........       406           --           388           --
                                            --------       ------      --------       ------
NETWORKS GROUP
Starz Encore..............................  $  2,745       $   50      $  3,090       $  141
Discovery.................................     3,143           80         3,068           65
Court TV..................................       272           --           248           --
GSN.......................................       101           --            95           --
Other consolidated subsidiaries...........       228            1           236            3
                                            --------       ------      --------       ------
  Combined Networks Group.................     6,489          131         6,737          209
Eliminate equity method affiliates........    (3,516)         (80)       (3,411)         (65)
                                            --------       ------      --------       ------
  Consolidated Networks Group.............     2,973           51         3,326          144
                                            --------       ------      --------       ------
Corporate and Other.......................    35,495        5,222        34,489        7,242
                                            --------       ------      --------       ------
Consolidated Liberty......................  $ 54,013       $5,354      $ 39,685       $7,390
                                            ========       ======      ========       ======
</Table>

                                      II-77
<PAGE>
                   LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

<Table>
<Caption>
                                                           YEARS ENDED DECEMBER 31,
                                                         ----------------------------
                                                          2003      2002       2001
                                                         -------   -------   --------
                                                            (AMOUNTS IN MILLIONS)
<S>                                                      <C>       <C>       <C>
Consolidated segment operating cash flow...............  $   832   $   424   $    377
Stock compensation.....................................       84        51       (132)
Depreciation and amortization..........................     (510)     (384)      (984)
Impairment of long-lived assets........................   (1,362)     (275)      (388)
Interest expense.......................................     (539)     (423)      (525)
Share of earnings (losses) of affiliates...............       58      (453)    (4,906)
Nontemporary declines in fair value of investments.....      (29)   (6,053)    (4,101)
Realized and unrealized gains (losses) on derivative
  instruments, net.....................................     (649)    2,122       (174)
Gains (losses) on dispositions, net....................    1,128      (415)      (310)
Other, net.............................................      137       205        261
                                                         -------   -------   --------
Loss before income taxes and minority interest.........  $  (850)  $(5,201)  $(10,882)
                                                         =======   =======   ========
</Table>

  REVENUE BY GEOGRAPHIC AREA

<Table>
<Caption>
                                                             YEARS ENDED DECEMBER 31,
                                                             ------------------------
                                                              2003     2002     2001
                                                             ------   ------   ------
                                                              (AMOUNTS IN MILLIONS)
<S>                                                          <C>      <C>      <C>
United States..............................................  $3,343   $1,859   $1,811
Foreign countries..........................................     685      225      248
                                                             ------   ------   ------
  Consolidated Liberty.....................................  $4,028   $2,084   $2,059
                                                             ======   ======   ======
</Table>

  LONG-LIVED ASSETS BY GEOGRAPHIC AREA

<Table>
<Caption>
                                                                   DECEMBER 31,
                                                              ----------------------
                                                                2003          2002
                                                              ---------     --------
                                                              (AMOUNTS IN MILLIONS)
<S>                                                           <C>           <C>
United States...............................................   $15,290       $5,278
Foreign countries...........................................     1,419          256
                                                               -------       ------
  Consolidated Liberty......................................   $16,709       $5,534
                                                               =======       ======
</Table>

                                      II-78
<PAGE>
                   LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(19)  QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

<Table>
<Caption>
                                                  1ST          2ND          3RD          4TH
                                                QUARTER      QUARTER      QUARTER      QUARTER
                                               ---------    ---------    ---------    ---------
                                               (AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S>                                            <C>          <C>          <C>          <C>
2003:
  Revenue....................................   $   505      $   500        $905       $ 2,118
                                                =======      =======        ====       =======
  Operating income (loss)....................   $    10      $   (46)       $147       $(1,067)
                                                =======      =======        ====       =======
  Net earnings (loss)........................   $   132      $  (464)       $ 41       $  (931)
                                                =======      =======        ====       =======
  Basic and diluted net earnings (loss) per
     common share............................   $   .05      $  (.17)       $.02       $  (.32)
                                                =======      =======        ====       =======
2002:
  Revenue....................................   $   513      $   510        $525       $   536
                                                =======      =======        ====       =======
  Operating income (loss)....................   $    52      $    13        $(39)      $  (210)
                                                =======      =======        ====       =======
  Earnings (loss) before cumulative effect of
     accounting change.......................   $   306      $(3,097)       $ 22       $  (692)
                                                =======      =======        ====       =======
  Net earnings (loss)........................   $(1,563)     $(3,097)       $ 22       $  (692)
                                                =======      =======        ====       =======
  Basic and diluted earnings (loss) before
     cumulative effect of accounting change
     per common share........................   $   .12      $ (1.20)       $.01       $  (.26)
                                                =======      =======        ====       =======
  Basic and diluted net earnings (loss) per
     common share............................   $  (.60)     $ (1.20)       $.01       $  (.26)
                                                =======      =======        ====       =======
</Table>

(20)  SUBSEQUENT EVENT

     Liberty's Board of Directors has approved a resolution authorizing the
Company to take the necessary actions to effect the spin-off of assets
principally comprised of the International Group as a tax free distribution to
its shareholders. The completion of this transaction is subject to, among other
things, a final determination of the assets to be included in the spin-off, the
receipt of a favorable tax opinion and regulatory and other third party
approvals. Upon completion of this transaction, the International Group will be
a separate publicly traded company. This transaction is expected to be accounted
for at historical cost due to the pro rata nature of the distribution.

                                      II-79
<PAGE>

                                   PART III.

     The following required information is incorporated by reference to our
definitive proxy statement for our 2004 Annual Meeting of shareholders presently
scheduled to be held in June 2004:

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

ITEM 11.  EXECUTIVE COMPENSATION

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
          RELATED STOCKHOLDER MATTERS

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES

     We will file our definitive proxy statement for our 2004 Annual Meeting of
shareholders with the Securities and Exchange Commission on or before April 29,
2003.

                                      III-1
<PAGE>

                                    PART IV.

ITEM 15.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

     (a)(1) Financial Statements

     Included in Part II of this Report:

<Table>
<Caption>
                                                              PAGE NO.
                                                              --------
<S>                                                           <C>
Liberty Media Corporation:
  Independent Auditors' Report..............................   II-33
  Consolidated Balance Sheets, December 31, 2003 and 2002...   II-34
  Consolidated Statements of Operations, Years ended
     December 31, 2003, 2002 and 2001.......................   II-35
  Consolidated Statements of Comprehensive Earnings (Loss),
     Years ended December 31, 2003, 2002 and 2001...........   II-36
  Consolidated Statements of Stockholders' Equity, Years
     ended December 31, 2003, 2002 and 2001.................   II-37
  Consolidated Statements of Cash Flows, Years Ended
     December 31, 2003, 2002 and 2001.......................   II-38
  Notes to Consolidated Financial Statements, December 31,
     2003, 2002 and 2001....................................   II-39
</Table>

     (a)(2) Financial Statement Schedules

     Included in Part IV of this Report:

          (i) All schedules have been omitted because they are not applicable,
     not material or the required information is set forth in the financial
     statements or notes thereto.

          (ii) Separate financial statements for Telewest Communications plc:

<Table>
<S>                                                           <C>
Auditor's Report............................................    IV-5
Consolidated Statements of Operations.......................    IV-6
Consolidated Balance Sheets.................................    IV-7
Consolidated Statements of Cash Flows.......................    IV-8
Consolidated Statements of Shareholders' Equity/(Deficit)
  and Comprehensive Loss....................................    IV-9
Notes to Consolidated Financial Statements..................   IV-10
</Table>

     (a)(3) Exhibits

     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):

<Table>
<C>      <S>
 3 -- Articles of Incorporation and Bylaws:
 3.1     Restated Certificate of Incorporation of Liberty, dated
         August 9, 2001 (incorporated by reference to Exhibit 3.2 to
         the Registration Statement on Form S-1 of Liberty Media
         Corporation (File No. 333-55998) as filed on February 21,
         2001 (the "Split Off S-1 Registration Statement")).
 3.2     Bylaws of Liberty, as adopted August 9, 2001 (incorporated
         by reference to Exhibit 3.4 of the Split Off S-1
         Registration Statement).

4 -- Instruments Defining the Rights of Securities Holders, including
  Indentures:
 4.1     Specimen certificate for shares of Series A common stock,
         par value $.01 per share, of the Registrant (incorporated by
         reference to Exhibit 4.1 to the Split Off S-1 Registration
         Statement).
 4.2     Specimen certificate for shares of Series B common stock,
         par value $.01 per share, of the Registrant (incorporated by
         reference to Exhibit 4.2 to the Split Off S-l Registration
         Statement).
</Table>

                                       IV-1
<PAGE>
<Table>
<C>      <S>
 4.3     Liberty undertakes to furnish the Securities and Exchange
         Commission, upon request, a copy of all instruments with
         respect to long-term debt not filed herewith.

10 -- Material Contracts:
10.1     Inter-Group Agreement dated as of March 9, 1999, between
         AT&T Corp. and Liberty Media Corporation, Liberty Media
         Group LLC and each Covered Entity listed on the signature
         pages thereof (incorporated by reference to Exhibit 10.2 to
         the Registration Statement on Form S-4 of Liberty Media
         Corporation (File No. 333-86491) as filed on September 3,
         1999, the "Liberty S-4 Registration Statement").
10.2     Ninth Supplement to Inter-Group Agreement dated as of June
         14, 2001, between and among AT&T Corp., on the one hand, and
         Liberty Media Corporation, Liberty Media Group LLC, AGI LLC,
         Liberty SP, Inc., LMC Interactive, Inc. and Liberty AGI,
         Inc., on the other hand (incorporated by reference to
         Exhibit 10.25 to the Registration Statement on Form S-1 of
         Liberty Media Corporation (File No. 333-66034) as filed on
         July 27, 2001).
10.3     Intercompany Agreement dated as of March 9, 1999, between
         Liberty and AT&T Corp. (incorporated by reference to Exhibit
         10.3 to the Liberty S-4 Registration Statement).
10.4     Tax Sharing Agreement dated as of March 9, 1999, by and
         among AT&T Corp., Liberty Media Corporation,
         Tele-Communications, Inc., Liberty Ventures Group LLC,
         Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings,
         Inc. and each Covered Entity listed on the signature pages
         thereof (incorporated by reference to Exhibit 10.4 to the
         Liberty S-4 Registration Statement).
10.5     First Amendment to Tax Sharing Agreement dated as of May 28,
         1999, by and among AT&T Corp., Liberty Media Corporation,
         Tele-Communications, Inc., Liberty Ventures Group LLC,
         Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings,
         Inc. and each Covered Entity listed on the signature pages
         thereof (incorporated by reference to Exhibit 10.5 to the
         Liberty S-4 Registration Statement).
10.6     Second Amendment to Tax Sharing Agreement dated as of
         September 24, 1999, by and among AT&T Corp., Liberty Media
         Corporation, Tele-Communications, Inc., Liberty Ventures
         Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT
         Holdings, Inc. and each Covered Entity listed on the
         signature pages thereof (incorporated by reference to
         Exhibit 10.6 to the Registration Statement on Form S-1 of
         Liberty Media Corporation (File No. 333-93917) as filed on
         December 30, 1999 (the "Liberty S-1 Registration
         Statement)).
10.7     Third Amendment to Tax Sharing Agreement dated as of October
         20, 1999, by and among AT&T Corp., Liberty Media
         Corporation, Tele-Communications, Inc., Liberty Ventures
         Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT
         Holdings, Inc. and each Covered Entity listed on the
         signature pages thereof (incorporated by reference to
         Exhibit 10.7 to the Liberty S-l Registration Statement).
10.8     Fourth Amendment to Tax Sharing Agreement dated as of
         October 28, 1999, by and among AT&T Corp., Liberty Media
         Corporation, Tele-Communications, Inc., Liberty Ventures
         Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT
         Holdings, Inc. and each Covered Entity listed on the
         signature pages thereof (incorporated by reference to
         Exhibit 10.8 to the Liberty S-l Registration Statement).
10.9     Fifth Amendment to Tax Sharing Agreement dated as of
         December 6, 1999, by and among AT&T Corp., Liberty Media
         Corporation, Tele-Communications, Inc., Liberty Ventures
         Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT
         Holdings, Inc. and each Covered Entity listed on the
         signature pages thereof (incorporated by reference to
         Exhibit 10.9 to the Liberty S-l Registration Statement).
10.10    Sixth Amendment to Tax Sharing Agreement dated as of
         December 10, 1999, by and among AT&T Corp., Liberty Media
         Corporation, Tele-Communications, Inc., Liberty Ventures
         Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT
         Holdings, Inc. and each Covered Entity listed on the
         signature pages thereof (incorporated by reference to
         Exhibit 10.10 to the Liberty S-l Registration Statement).
</Table>

                                       IV-2
<PAGE>
<Table>
<C>      <S>
10.11    Seventh Amendment to Tax Sharing Agreement dated as of
         December 30, 1999, by and among AT&T Corp., Liberty Media
         Corporation, Tele-Communications, Inc., Liberty Ventures
         Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT
         Holdings, Inc. and each Covered Entity listed on the
         signature pages thereof (incorporated by reference to
         Exhibit 10.11 to the Liberty S-l Registration Statement).
10.12    Eighth Amendment to Tax Sharing Agreement dated as of July
         25, 2000, by and among AT&T Corp., Liberty Media
         Corporation, AT&T Broadband LLC, Liberty Ventures Group LLC,
         Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings,
         Inc. and each Covered Entity listed on the signature pages
         thereof (incorporated by reference to Exhibit 10.12 to the
         Split Off Registration Statement).
10.13    Instrument dated January 14, 2000, adding The Associated
         Group, Inc. as a party to the Tax Sharing Agreement dated as
         of March 9, 1999, as amended, among The Associated Group,
         Inc., AT&T Corp., Liberty Media Corporation,
         Tele-Communications, Inc., Liberty Ventures Group LLC,
         Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings,
         Inc. and each Covered Entity listed on the signature pages
         thereof (incorporated by reference to Exhibit 10.12 to the
         Liberty S-1 Registration Statement).
10.14    Restated and Amended Employment Agreement dated November 1,
         1992, between Tele-Communications, Inc. and John C. Malone
         (assumed by Liberty as of March 9, 1999), and the amendment
         thereto dated June 30, 1999 and effective as of March 9,
         1999, between Liberty and John C. Malone (incorporated by
         reference to Exhibit 10.6 to the Liberty S-4 Registration
         Statement).
10.15    Second Amendment to Employment Agreement dated November 1,
         1992 between TCI and John C. Malone (assumed by Liberty as
         of March 9, 1999), as amended effective March 9, 1999, filed
         herewith.
10.16    Amended and Restated Agreement and Plan of Restructuring and
         Merger among UnitedGlobalCom, Inc., New UnitedGlobalCom,
         Inc., United/New United Merger Sub, Inc., Liberty Media
         Corporation, Liberty Media International, Inc. and Liberty
         Global, Inc., dated December 31, 2001 (incorporated by
         reference to Current Form 8-K filed by Liberty Media
         Corporation on January 9, 2002, Commission File No.
         0-20421).
10.17    Liberty Media Corporation 2000 Incentive Plan (As Amended
         and Restated Effective September 11, 2002) (incorporated by
         reference to Exhibit 10.16 to Liberty's Annual Report on
         Form 10-K/A for the year ended December 31, 2002, Commission
         File No. 0-20421).
10.18    Liberty Media Corporation 2002 Non-employee Director
         Incentive Plan (incorporated by reference to Exhibit 10.17
         to Liberty's Annual Report on Form 10-K/A for the year ended
         December 31, 2002, Commission File No. 0-20421).
10.19    Letter Agreement, dated as of May 8, 2003, between Robert R.
         Bennett and Liberty regarding Mr. Bennett's personal use of
         Liberty's aircraft, filed herewith.
10.20    Amended and Restated Stock Purchase Agreement, dated as of
         June 30, 2003, by and among Liberty, Comcast, Comcast QVC,
         Inc. and QVC, Inc. (incorporated by reference to Exhibit
         99.1 to the Company's Current Report on Form 8-K filed on
         September 18, 2003, Commission File No. 0-20421).
21       Subsidiaries of Liberty Media Corporation, filed herewith.
23.1     Consent of KPMG LLP, filed herewith.
23.2     Consent of KPMG Audit plc, filed herewith.
31.1     Rule 13a-14(a)/15d - 14(a) Certification, filed herewith.
31.2     Rule 13a-14(a)/15d - 14(a) Certification, filed herewith.
31.3     Rule 13a-14(a)/15d - 14(a) Certification, filed herewith.
32       Section 1350 Certification, filed herewith.
</Table>

                                       IV-3
<PAGE>

     (b) Reports on Form 8-K filed during the quarter ended December 31, 2003:

<Table>
<Caption>
                                                                             FINANCIAL
                                                                             STATEMENTS
DATE OF REPORT                                              ITEM REPORTED      FILED
--------------                                              -------------    ----------
<S>                                                         <C>              <C>
November 12, 2003.........................................  Items 2 and 7       None
November 14, 2003*........................................  Items 9 and 12      None
December 2, 2003..........................................  Items 5 and 7       None
December 4, 2003..........................................  Items 5 and 7       None
</Table>

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

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

                                       IV-4
<PAGE>

                   AUDITED CONSOLIDATED FINANCIAL STATEMENTS

AUDITOR'S REPORT
to the board of directors and shareholders of Telewest Communications plc

     We have audited the accompanying consolidated balance sheets of Telewest
Communications plc and subsidiaries (the Group) as of December 31, 2002 and
2001, and the related consolidated statements of operations, shareholders'
equity/(deficit) and comprehensive income and cash flows for each of the years
in the three-year period ended December 31, 2002. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

     We conducted our audits in accordance with generally accepted auditing
standards in the United Kingdom and the United States of America. Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

     In our opinion, the consolidated financial statements on pages IV-6 to
IV-47 present fairly, in all material respects, the financial position of
Telewest Communications plc and subsidiaries as of December 31, 2002 and 2001,
and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 2002 in conformity with generally
accepted accounting principles in the United States of America.

     The accompanying financial statements have been prepared assuming that the
Group will continue as a going concern. As discussed in note 2 to the financial
statements, the Group has suffered recurring losses, has a net shareholders
deficit and is undergoing financial restructuring and this raises substantial
doubt about its ability to continue as a going concern. Management's plans in
regard to these matters are also described in note 2. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.

     As discussed in note 3 to the consolidated financial statements, the 2002
consolidated financial statements have been restated.

     As discussed in note 4 to the consolidated financial statements, the Group
adopted SFAS 141, Business Combinations and SFAS 142, Goodwill and Other
Intangible Assets, in 2002.

     As discussed in note 4 to the consolidated financial statements, the Group
changed its method of accounting for derivative instruments and hedging
activities in 2001.

KPMG AUDIT PLC
Chartered Accountants
Registered Auditor
London, England

March 26, 2003, except for note 3, which is as of January 16, 2004.

                                       IV-5
<PAGE>

                     CONSOLIDATED STATEMENTS OF OPERATIONS

                            YEARS ENDED DECEMBER 31

<Table>
<Caption>
                                                        (NOTE 2)
                                                          2002          2002
                                                        RESTATED      RESTATED      2001        2000
                                              NOTES     $ MILLION     L MILLION   L MILLION   L MILLION
                                              -----   -------------   ---------   ---------   ---------
<S>                                           <C>     <C>             <C>         <C>         <C>
REVENUE
Cable television............................                 541           336         329         279
Consumer telephony..........................                 797           495         488         445
Internet and other..........................                 101            63          40          16
                                                         -------       -------     -------     -------
TOTAL CONSUMER DIVISION.....................               1,439           894         857         740
Business Services Division..................                 455           283         268         248
                                                         -------       -------     -------     -------
TOTAL CABLE DIVISION........................               1,894         1,177       1,125         988
Content Division............................                 171           106         129          81
                                                         -------       -------     -------     -------
TOTAL REVENUE...............................               2,065         1,283       1,254       1,069
                                                         =======       =======     =======     =======
OPERATING COSTS AND EXPENSES
Consumer programming expenses...............                 206           128         142         132
Business and consumer telephony expenses....                 351           218         235         235
Content expenses............................                 113            70          83          46
Depreciation................................                 797           495         469         423
Impairment of fixed assets..................               1,353           841          --          --
                                                         -------       -------     -------     -------
Cost of sales...............................               2,820         1,752         929         836
Selling, general and administrative
  expenses..................................                 846           526         497         445
Amortization of goodwill....................                  --            --         183         147
Impairment of goodwill......................               2,326         1,445         766          --
                                                         -------       -------     -------     -------
                                                           5,992         3,723       2,375       1,428
                                                         =======       =======     =======     =======
OPERATING LOSS..............................              (3,927)       (2,440)     (1,121)       (359)
                                                         =======       =======     =======     =======
Interest income (including L12 million, L15
  million and L15 million in 2002, 2001 and
  2000, respectively, from related
  parties)..................................   22             30            19          15          15
Interest expense (including amortization of
  debt discount)............................                (850)         (528)       (487)       (385)
Foreign exchange gains/(losses), net........                 343           213          --         (15)
Share of net losses of affiliates and
  impairment................................                (190)         (118)       (216)        (15)
Other, net..................................                  58            36          (3)         (3)
Minority interests in losses of consolidated
  subsidiaries, net.........................                   2             1           1           1
                                                         -------       -------     -------     -------
LOSS BEFORE INCOME TAXES....................              (4,534)       (2,817)     (1,811)       (761)
Income tax benefit..........................   17             45            28          70           6
                                                         -------       -------     -------     -------
NET LOSS....................................              (4,489)       (2,789)     (1,741)       (755)
                                                         =======       =======     =======     =======
Basic and diluted loss per ordinary share...             $ (1.56)      L (0.97)    L (0.60)    L (0.28)
Weighted average number of ordinary shares
  outstanding (millions)....................               2,873         2,873       2,880       2,705
                                                         -------       -------     -------     -------
</Table>

All income is derived from continuing operations.

        See accompanying notes to the consolidated financial statements.
                                       IV-6
<PAGE>

                          CONSOLIDATED BALANCE SHEETS

                            YEARS ENDED DECEMBER 31

<Table>
<Caption>
                                                                  (NOTE 2)
                                                                    2002          2002
                                                                  RESTATED      RESTATED      2001
                                                        NOTES     $ MILLION     L MILLION   L MILLION
                                                        -----   -------------   ---------   ---------
<S>                                                     <C>     <C>             <C>         <C>
ASSETS
Cash and cash equivalents.............................                 628          390          14
Secured cash deposits restricted for more than one
  year................................................   21             19           12          20
Trade receivables (net of allowance for doubtful
  accounts of L12 million and L16 million)............                 193          120         116
Other receivables.....................................    9            110           68         112
Prepaid expenses......................................                  43           27          33
                                                                   -------       ------      ------
Total current assets..................................                 993          617         295
Investment in affiliates, accounted for under the
  equity method, and related receivables..............   10            605          376         547
Property and equipment (less accumulated depreciation
  of L3,196 million and L1,873 million)...............   11          4,182        2,598       3,473
Goodwill (less accumulated amortization of L2,593
  million and L1,148 million).........................    6            719          447       1,892
Inventory.............................................   14             45           28          67
Other assets (less accumulated amortization and write
  offs of L76 million and L47 million)................   13             47           29          58
                                                                   -------       ------      ------
TOTAL ASSETS..........................................               6,591        4,095       6,332
                                                                   =======       ======      ======
LIABILITIES AND SHAREHOLDERS' FUNDS
Accounts payable......................................                 177          110         109
Other liabilities.....................................   15          1,019          633         524
Debt repayable within one year........................   16          8,762        5,444          --
                                                                   -------       ------      ------
Total current liabilities.............................               9,958        6,187         633
Deferred tax..........................................   17            137           85         113
Debt repayable after more than one year...............   16             10            6       4,897
Capital lease obligations.............................                 328          204         238
                                                                   -------       ------      ------
TOTAL LIABILITIES.....................................              10,433        6,482       5,881
                                                                   =======       ======      ======
MINORITY INTERESTS....................................                  (2)          (1)         --
                                                                   =======       ======      ======
SHAREHOLDERS' (DEFICIT)/EQUITY
Ordinary shares, 10 pence par value; 4,300 million
  authorized; 2,873 and 2,886 million issued in 2002
  and 2001 respectively...............................                 462          287         287
Limited voting convertible ordinary shares, 10 pence
  par value; 300 million authorized and 82 million and
  63 million outstanding in 2002 and 2001
  respectively........................................                  13            8           8
Additional paid in capital............................               6,797        4,223       4,224
Accumulated deficit...................................             (11,094)      (6,893)     (4,104)
Accumulated other comprehensive (loss)/income.........   20            (18)         (11)         37
                                                                   -------       ------      ------
                                                                    (3,840)      (2,386)        452
Ordinary shares held in trust for the Telewest
  Restricted Share Scheme and the Telewest Long-Term
  Incentive Plan......................................                  --           --          (1)
                                                                   -------       ------      ------
TOTAL SHAREHOLDERS' (DEFICIT)/EQUITY..................              (3,840)      (2,386)        451
                                                                   =======       ======      ======
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............               6,591        4,095       6,332
                                                                   =======       ======      ======
</Table>

        See accompanying notes to the consolidated financial statements.
                                       IV-7
<PAGE>

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                            YEARS ENDED DECEMBER 31

<Table>
<Caption>
                                                           (NOTE 2)
                                                             2002          2002
                                                           RESTATED      RESTATED      2001        2000
                                                           $ MILLION     L MILLION   L MILLION   L MILLION
                                                         -------------   ---------   ---------   ---------
<S>                                                      <C>             <C>         <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss...............................................     (4,489)       (2,789)     (1,741)      (755)
Adjustments to reconcile net loss to net cash
  provided/(utilized) by operating activities
  Depreciation.........................................        797           495         469        423
Impairment of fixed assets.............................      1,353           841          --         --
Amortization of goodwill...............................         --            --         183        147
Impairment of goodwill.................................      2,326         1,445         766         --
Amortization and write off of deferred financing costs
  and issue discount on Senior Discount Debentures.....        184           114          99        147
Deferred tax credit....................................        (45)          (28)        (70)        --
Unrealized (gain)/loss on foreign currency
  translation..........................................       (343)         (213)        (10)        20
Non-cash accrued share based compensation
  (credit)/cost........................................         (2)           (1)          1          5
Share of net (profits)/losses of affiliates and
  impairment...........................................        (16)          (10)        216         15
Loss on disposal of assets.............................        148            92           4         --
Minority interests in losses of consolidated
  subsidiaries.........................................         --            --          (1)        (1)
Changes in operating assets and liabilities net of
  effect of acquisition of subsidiaries Change in
  receivables..........................................         31            19          25         (8)
Change in prepaid expenses.............................         10             6           6        (19)
Change in accounts payable.............................         27            17           3         (2)
Change in other liabilities............................        160           100          62         70
Change in other assets.................................         24            15           1        (46)
                                                            ------        ------      ------       ----
NET CASH PROVIDED/(UTILIZED) BY OPERATING ACTIVITIES...        165           103          13         (4)
                                                            ======        ======      ======       ====
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for property and equipment...................       (721)         (448)       (548)      (527)
Cash paid for acquisition of subsidiaries, net of cash
  acquired.............................................         --            --          (6)       (24)
Additional investments in and loans to affiliates......         --            --         (26)       (10)
Repayment of loans made to joint ventures (net)........         14             9           9          3
Proceeds from disposal of assets.......................          2             1           2          2
Disposal of subsidiary undertaking, net of cash
  disposed.............................................         23            14           8         --
Disposal of associate undertaking, net of cash
  disposed.............................................         95            59          --         --
                                                            ------        ------      ------       ----
NET CASH USED IN INVESTING ACTIVITIES..................       (587)         (365)       (561)      (556)
                                                            ======        ======      ======       ====
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of share options................         --            --           6          3
Share issue costs......................................         --            --          --        (13)
Proceeds from issue of Senior Discount Notes and Senior
  Notes 2010...........................................         --            --          --        544
Proceeds from issue of Senior Convertible Notes 2005...         --            --          --        330
Proceeds from issue of Accreting Convertible Notes
  2003.................................................         --            --          30         20
Issue costs of Notes and credit facility arrangement
  costs................................................         --            --         (41)        --
Net proceeds from maturity of forward contracts........        122            76          --        107
Release/(placement) of restricted deposits.............         13             8          (8)        --
Repayments from borrowings under old credit
  facilities...........................................         (3)           (2)       (824)      (141)
Repayment of SMG equity swap...........................        (53)          (33)         --         --
Proceeds/(repayment) from borrowings under new credit
  facility.............................................      1,030           640       1,393       (260)
Capital element of finance lease repayments............        (82)          (51)        (54)       (35)
                                                            ------        ------      ------       ----
NET CASH PROVIDED BY FINANCING ACTIVITIES..............      1,027           638         502        555
                                                            ======        ======      ======       ====
Net increase/(decrease) in cash and cash equivalents...        605           376         (46)        (5)
Cash and cash equivalents at beginning of year.........         23            14          60         65
                                                            ------        ------      ------       ----
CASH AND CASH EQUIVALENTS AT END OF YEAR...............        628           390          14         60
                                                            ======        ======      ======       ====
</Table>

        See accompanying notes to the consolidated financial statements.
                                       IV-8
<PAGE>

         CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY/(DEFICIT) AND
                               COMPREHENSIVE LOSS

<Table>
<Caption>
                                           LIMITED     SHARES                           OTHER
                              ORDINARY     VOTING      HELD IN      ADDITIONAL      COMPREHENSIVE   ACCUMULATED
                               SHARES      SHARES       TRUST     PAID-IN CAPITAL       LOSS          DEFICIT       TOTAL
                              L MILLION   L MILLION   L MILLION      L MILLION        L MILLION      L MILLION    L MILLION
                              ---------   ---------   ---------   ---------------   -------------   -----------   ---------
<S>                           <C>         <C>         <C>         <C>               <C>             <C>           <C>
BALANCE AT DECEMBER 31,
  1999......................     228           6          (2)          2,328              --          (1,608)         952
Ordinary shares issued on
  exercise of share
  options...................      --          --          --               3              --              --            3
Shares issued to acquire
  Flextech Plc net of issue
  costs.....................      60          --          --           1,873              --              --        1,933
Accrued share based
  compensation cost.........      --          --          --               5              --              --            5
Unrealised gain on deemed
  disposal of shares in an
  affiliate.................      --          --          --               7              --              --            7
Net loss....................      --          --          --              --              --            (755)        (755)
                                 ---         ---         ---           -----             ---          ------       ------
BALANCE AT DECEMBER 31,
  2000......................     288           6          (2)          4,216              --          (2,363)       2,145
Unrealised gain/(loss) on
  derivative financial
  instruments:
  Cumulative effects of
    accounting change.......      --          --          --              --             (16)             --          (16)
  Amounts reclassified into
    earnings................      --          --          --              --              (5)             --           (5)
  Current period increase in
    fair value..............      --          --          --              --              57              --           57
Net loss....................      --          --          --              --              --          (1,741)      (1,741)
                                                                                                                   ------
TOTAL COMPREHENSIVE LOSS....                                                                                       (1,705)
Unrealised gain on deemed
  partial disposal of
  investment................      --          --          --              --               1              --            1
Ordinary shares issued on
  exercise of share
  options...................       1          --           1               6              --              --            8
Gain on retranslation of
  investment in an overseas
  subsidiary................      --          --          --               1              --              --            1
Redesignation of ordinary
  shares....................      (2)          2          --              --              --              --           --
Accrued share based
  compensation cost.........      --          --          --               1              --              --            1
                                 ---         ---         ---           -----             ---          ------       ------
BALANCE AT DECEMBER 31,
  2001......................     287           8          (1)          4,224              37          (4,104)         451
Unrealised gain/(loss) on
  derivative financial
  instruments:
  Amounts reclassified into
    earnings................      --          --          --              --             (48)             --          (48)
Net loss (restated).........      --          --          --              --              --          (2,789)      (2,789)
                                                                                                                   ------
TOTAL COMPREHENSIVE LOSS
  (RESTATED)................                                                                                       (2,837)
Accrued share based
  compensation
  (credit)/cost.............      --          --           1              (1)             --              --           --
                                 ---         ---         ---           -----             ---          ------       ------
BALANCE AT DECEMBER 31, 2002
  (RESTATED)................     287           8          --           4,223             (11)         (6,893)      (2,386)
                                 ===         ===         ===           =====             ===          ======       ======
</Table>

There was no other comprehensive income in the year ended December 31, 2000.

        See accompanying notes to the consolidated financial statements.
                                       IV-9
<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

1  ORGANIZATION AND HISTORY

     Telewest Communications plc ("the Company") and its subsidiary undertakings
(together "the Group") provide cable television, telephony and internet services
to business and residential customers in the United Kingdom ("UK"). The Group
derives its cable television revenues from installation fees, monthly basic and
premium service fees and advertising charges. The Group derives its telephony
revenues from connection charges, monthly line rentals, call charges, special
residential service charges and interconnection fees payable by other operators.
The Group derives its internet revenues from installation fees and monthly
subscriptions to its ISP. The cable television, telephony and internet services
account in 2002 for approximately 26%, 61% and 5%, respectively, of the Group's
revenue.

     The Group is also engaged in broadcast media activities, being the supply
of entertainment content, interactive and transactional services to the UK
pay-TV broadcasting market. The Content Division accounts in 2002 for
approximately 8% of the Group's revenue.

2  BASIS OF PREPARATION

     The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles in the United States of America ("US
GAAP"). The preparation of financial statements in conformity with US 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 revenues and expenses during the reporting period. The
Group's significant estimates and assumptions include capitalisation of labor
and overhead costs; impairment of goodwill and long-lived assets (see note 6);
and accounting for debt and financial instruments (see note 5). Actual results
could differ from those estimates.

     The financial statements are prepared on a going concern basis, which the
directors believe to be appropriate for the following reasons:

     Following the directors' decision on September 30, 2002 not to pay the
interest on certain of the Group's bonds and other hedging instruments, the
Group is now in default of its bonds and its Senior Secured Facility.

     These liabilities are now due for repayment in full and the Group is
negotiating with its bondholder creditors and bank facility creditors to effect
a reorganization of the Group's debt. This will involve, among other things, the
conversion of bond debt to equity and the renegotiation of existing bank
facilities. The directors believe the amended facilities will provide the Group
with sufficient liquidity to meet the Group's funding needs after completion of
the Financial Restructuring. Further details of the planned Financial
Restructuring are included in note 23.

     In order for the Financial Restructuring to be effective, the Scheme
Creditors need to approve the plans by the relevant statutory majority. In
addition, the Group's shareholders need to approve the proposed share capital
reorganization.

     The directors are of the opinion that the status of negotiations of the
financial restructuring will lead to a successful outcome and that this is
sufficient grounds for issuing the annual financial statements under the
assumption of going concern.

     The effect on the financial statements as presented, of the going concern
basis of preparation being inappropriate, is principally that the book value of
tangible fixed assets and investments would be restated from their present value
in use to a net realizable value. Whilst the directors believe that the net
realizable values would be lower than the current value in use there is
insufficient information available for the directors to quantify the difference.

                                      IV-10
<PAGE>
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The Group faces the following significant risks and uncertainties about:

     - its continued ability to raise finance to fund its operations;

     - its successful execution of its long term business plan, which in turn
       will affect the Group's ability to raise further finance under the Senior
       Secured Facility (see note 16); and

     - the need to meet financial and other covenants relating to debt
       instruments which have already been issued.

     The economic environment and currency in which the Group operates is the
United Kingdom and hence its reporting currency is Pounds Sterling (L). Certain
financial information for the year ended December 31, 2002 has been translated
into US Dollars ($), with such US Dollar amounts being unaudited and presented
solely for the convenience of the reader, at the rate of $1.6095 = L1.00, the
Noon Buying Rate of the Federal Reserve Bank of New York on December 31, 2002.
The presentation of the US Dollar amounts should not be construed as a
representation that the Pounds Sterling amounts could be so converted into US
Dollars at the rate indicated or at any other rate.

3  RESTATEMENT

     Subsequent to the issuance of our consolidated financial statements as of
and for the year ended December 31, 2002, we have determined the need to adjust
the classification of debt previously reflected as non-current in the
consolidated balance sheet at December 31, 2002 and write off deferred financing
costs as at December 31, 2002 relating to the restated debt. The adjustment of
debt reclassifies L1,792 million from non-current "Debt repayable after more
than one year" to "Debt repayable within one year". The write off of deferred
financing costs decreases other assets and increases interest expense and net
loss as at and for the year ended December 31, 2002 by L11 million. There was no
impact on the 2001 Consolidated Financial Statements.

     These adjustments have been made because the Company recently determined
that the effect of non-payment of a hedge contract of L10.5 million in 2002
triggered a default on an additional L1,792 million of bond debt as at December
31, 2002.

     We have also determined the need to accrue additional interest of L2
million relating to additional interest for bonds in default as at December 31,
2002. This adjustment increases net loss, interest expense and other liabilities
by L2 million as at and for the year ended December 31, 2002.

<Table>
<Caption>
                                                                RESTATEMENT IMPACT ON
                                                                  DECEMBER 31, 2002
                                                              -------------------------
BALANCE SHEET (IN L MILLIONS)                                 AS REPORTED   AS RESTATED
-----------------------------                                 -----------   -----------
<S>                                                           <C>           <C>
Other assets................................................        40            29
Total assets................................................     4,106         4,095
Debt repayable within one year..............................     3,652         5,444
Other liabilities...........................................       631           633
Total current liabilities...................................     4,393         6,187
Debt repayable after more than one year.....................     1,798             6
Accumulated deficit.........................................    (6,880)       (6,893)
Total shareholders' (deficit)/equity........................    (2,373)       (2,386)
                                                                ======        ======
</Table>

<Table>
<Caption>
                                                                 RESTATEMENT IMPACT
                                                                 FOR THE YEAR ENDED
                                                                  DECEMBER 31, 2002
CONSOLIDATED STATEMENT OF OPERATIONS                          -------------------------
(IN L MILLIONS, EXCEPT PER SHARE DATA)                        AS REPORTED   AS RESTATED
--------------------------------------                        -----------   -----------
<S>                                                           <C>           <C>
Interest expense............................................      (515)         (528)
Net loss....................................................    (2,776)       (2,789)
                                                                ======        ======
</Table>

                                      IV-11
<PAGE>
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<Table>
<Caption>
                                                                RESTATEMENT IMPACT ON
                                                                  DECEMBER 31, 2002
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY/(DEFICIT)      -------------------------
AND COMPREHENSIVE LOSS (IN L MILLIONS)                        AS REPORTED   AS RESTATED
--------------------------------------------------------      -----------   -----------
<S>                                                           <C>           <C>
Total comprehensive loss....................................    (2,824)       (2,837)
                                                                ======        ======
</Table>

4  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

  PRINCIPLES OF CONSOLIDATION

     The consolidated financial statements include the accounts of the Company
and those of its majority-owned subsidiaries. All significant inter-company
accounts and transactions have been eliminated upon consolidation. All
acquisitions have been accounted for under the purchase method of accounting.
Under this method, the results of subsidiaries and affiliates acquired in the
year are included in the consolidated statement of operations from the date of
acquisition.

  IMPAIRMENT OF LONG LIVED ASSETS AND GOODWILL

     The Group applies Statement of Financial Accounting Standard ("SFAS") No.
144, Accounting for the Impairment or disposal of Long-Lived Assets. The Group
adopted, from January 1, 2002 SFAS 144 which requires that long-lived assets and
certain identifiable intangibles, including goodwill, to be held and used by an
entity, be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Indications of impairment are determined by reviewing undiscounted projected
future cash flows. If impairment is indicated, the amount of the impairment is
the amount by which the carrying value exceeds the fair value of the assets.

  BUSINESS COMBINATIONS AND GOODWILL AND OTHER INTANGIBLE ASSETS

     In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
141, Business Combinations and SFAS 142, Goodwill and Other Intangible Assets.
SFAS 141 requires all business combinations undertaken after June 30, 2001 to be
accounted for using the purchase method. Under SFAS 142, goodwill arising from
business combinations and intangible assets with indefinite lives are no longer
amortized but are subject to annual review for impairment (or more frequently
should indications of impairment arise). Goodwill associated with equity-method
investments will also no longer be amortized upon adoption of SFAS 142, but will
be subject to impairment testing as part of the investment to which it relates
in accordance with Accounting Principles Board Opinion No. ("APB") 18, The
Equity Method of Accounting for Investments in Common Stock. Separable
intangible assets that do not have indefinite lives will continue to be
amortized over their estimated useful lives and will be subject to review for
impairment in accordance with SFAS 144 (see below). The amortization provisions
of SFAS 142 apply to goodwill and intangible assets acquired after June 30,
2001. For goodwill and intangible assets acquired prior to July 1, 2001, the
Group was required to adopt SFAS 142 effective January 1, 2002. As of January 1,
2002 the Group had L2,199 million of unamortized goodwill, L1,892 million of
which related to business combinations and L307 million of which related to
equity-method investments.

     Impairment under SFAS 142 is measured using a two-step approach, initially
based on a comparison of the reporting unit's fair value to its carrying value;
if the fair value is lower, then the second step compares the implied fair value
of the goodwill with its carrying value to determine the amount of the
impairment. In connection with SFAS 142's transitional goodwill impairment
evaluation, the Statement required the Company to perform an assessment of
whether there was an indication that goodwill was impaired as of the date of
adoption of January 1, 2002. The Company compared the individual carrying value
of its two reporting units, Cable and Content, to their respective fair values.
The fair values of the respective reporting units were determined from an
analysis of discounted cash flows based on the Company's budgets and long range
plan. The discounted cash flow analysis was performed at a reporting unit level.
At January 1, 2002 the fair values of

                                      IV-12
<PAGE>
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

both reporting units were greater than their respective carrying values and
therefore the adoption of SFAS 142 on January 1, 2002, had no impact on the
Company's financial position or results of operations.

  CASH AND CASH EQUIVALENTS

     Cash and cash equivalents include highly liquid investments with original
maturities of three months or less that are readily convertible into cash.

  DERIVATIVES AND HEDGING

     At January 1, 2001 the Company adopted SFAS 133 Accounting for Derivative
Instruments and Hedging Activities as amended by SFAS 137 and SFAS 138. SFAS 133
established accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and
hedging activities. It requires the recognition at fair value of all derivative
instruments as assets or liabilities in the Company's balance sheet. The
accounting treatment of changes in fair value is dependent upon whether or not a
derivative instrument is designated a hedge and if so, the type of hedge and its
effectiveness as a hedge.

     For derivatives, which are not designated as hedges, changes in fair value
are recorded immediately in earnings.

     For derivatives designated as cash flow hedges, changes in fair value on
the effective portion of the hedging instrument are recorded within other
comprehensive income ("OCI") until the hedged transaction occurs and are then
recorded within earnings. Changes in the ineffective portion of a hedge are
recorded in earnings. For derivatives designated as fair value hedges, changes
in fair value are recorded in earnings. The Group has not, however, had any fair
value hedges since the adoption of SFAS 133.

     The Group discontinues hedge accounting for derivative financial
instruments when it is determined that the derivative instrument is no longer
effective in offsetting changes in the cash flows of the hedged item; the
derivative instrument expires or is sold; the derivative instrument is no longer
designated as a hedging instrument, because it is unlikely that a forecasted
transaction will occur; a hedged firm commitment no longer meets the definition
of a firm commitment; or its management determines that designation of the
derivative instrument as a hedging instrument is no longer appropriate. The
tests for determining the effectiveness of a cash flow hedge compare on a strict
basis the amount and timing of cash flows on the underlying economic exposure
with the cash flows of the derivative instrument.

     Upon discontinuation of cash flow hedge accounting, the net gain or loss
attributable to the hedging instrument, which has been reported in OCI to the
date of discontinuation, continues to be reported in OCI until the date the
hedged transaction impacts earnings. This occurs unless it is probable that the
hedged transaction will not occur by the end of the originally specified time
period. If the hedged transaction is not expected to occur, the net gain or loss
is reclassified from OCI to earnings upon discontinuation.

     Prior to adoption of SFAS 133 the Group had the following accounting
policies in respect of financial instruments. Foreign currency forward
contracts, options and swaps, which were used to reduce the exchange risk on the
principal amounts and early call premiums on certain foreign currency
borrowings, were recorded on the balance sheet at their fair value. Gains and
losses arising from changes in fair value were recorded concurrently within
earnings. Such gains and losses were offset by gains and losses arising from
retranslating the principal amounts of the foreign currency borrowings.

     The Group also used foreign currency forward contracts and cross currency
interest rate swaps to reduce its exposure to adverse changes in exchange rates
associated with the interest payments on certain foreign currency borrowings.
Such foreign currency forward contracts and cross currency interest rate swaps
were accounted for using the accruals method.

     The Group also used interest rate swap agreements and an interest rate
collar to manage interest rate risk on the Group's borrowings. Net income or
expense resulting from the differential between exchanging floating

                                      IV-13
<PAGE>
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

and fixed interest payments was recorded within the consolidated statement of
operations on an accruals basis from the effective date of the interest rate
swap agreements and interest rate collar.

  INVESTMENTS

     Generally, investments in partnerships, joint ventures and subsidiaries in
which the Group's voting interest is 20% to 50%, and others where the Group has
significant influence, are accounted for using the equity method. Investments
which do not have a readily determinable fair value, in which the Group's voting
interest is less than 20%, and in which the Group does not have significant
influence, are carried at cost and written down to the extent that there has
been an other-than-temporary diminution in value. The Group accounts for certain
investments in which the Group's ownership is greater than 50% using the equity
method. This method is used for such subsidiaries where the minorities have
substantive participating rights such as veto over key operational and financial
matters and equal representation on the board of directors.

     The Group reviews the carrying values of its investments in affiliates,
including any associated goodwill, to ensure that the carrying amount of such
investments are stated at no more than their recoverable amounts. The Group
assesses the recoverability of its investments by determining whether the
carrying value of the investments can be recovered through projected discounted
future operating cash flows (excluding interest) of the operations underlying
the investments. The assessment of the recoverability of the investments will be
impacted if projected future operating cash flows are not achieved. The amount
of impairment, if any, is measured based on the projected discounted future
operating cash flows using a rate commensurate with the risks associated with
the assets.

  ADVERTISING COSTS

     Advertising costs are expensed as incurred. The amount of advertising costs
expensed was L52 million, L48 million, and L38 million for the years ended
December 31, 2002, 2001, and 2000, respectively.

  PROPERTY AND EQUIPMENT

     Property and equipment is stated at cost. Depreciation is provided to
write-off the cost, less estimated residual value, of property and equipment by
equal installments over their estimated useful economic lives as follows:

<Table>
<S>                                                           <C>
Freehold and long leasehold buildings.......................  50 years
Cable and ducting...........................................  20 years
Electronic equipment
  System electronics........................................   8 years
  Switching equipment.......................................   8 years
  Subscriber electronics....................................   5 years
  Headend, studio, and playback facilities..................   5 years
Other equipment
  Office furniture and fittings.............................   5 years
  Motor vehicles............................................   4 years
</Table>

     The Group accounts for costs, expenses and revenues applicable to the
construction and operation of its cable systems in accordance with SFAS 51
Financial Reporting by Cable Television Companies. Initial subscriber
installation costs are capitalized and depreciated over the life of the network.

                                      IV-14
<PAGE>
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  DEFERRED FINANCING COSTS

     Direct costs incurred in raising debt are deferred and recorded on the
consolidated balance sheet in other assets. The costs are amortized to the
consolidated statement of operations at a constant rate to the carrying value of
the debt over the life of the obligation. Deferred financing costs in respect of
bond debt in default are written off immediately to the consolidated statement
of operations.

  MINORITY INTERESTS

     Recognition of the minority interests' share of losses of consolidated
subsidiaries is limited to the amount of such minority interests' allocable
portion of the equity of those consolidated subsidiaries.

  FOREIGN CURRENCIES

     Transactions in foreign currencies are recorded using the rate of exchange
in effect at the date of the transaction. Monetary assets and liabilities
denominated in foreign currencies are translated using the rate of exchange
prevailing at the balance sheet date and the gains or losses on translation are
included in the consolidated statement of operations.

  REVENUE RECOGNITION

     Revenues are recognized as network communication services are provided.
Credit risk is managed by disconnecting services to customers who are
delinquent. Connection and activation fees relating to cable television,
telephony and internet are recognized in the period of connection to the extent
that such fees are less than direct selling costs. Any excess connection and
activation fees over direct selling costs incurred are deferred and amortized
over the expected customer life.

     Occasionally the Group sells capacity on its network to other
telecommunications providers. Sales of capacity are accounted for as sales-type
leases, operating leases, or service agreements depending on the terms of the
transaction. If title is not transferred or if the other requirements of
sales-type lease accounting are not met, revenues are recognized rateably over
the term of the agreement.

     Programming revenues are recognized in accordance with Statement of
Position ("SOP") 00-2, Accounting by Producers or Distributors of Films. Revenue
on transactional and interactive sales is recognized as and when the services
are delivered. Advertising sales revenue is recognized at estimated realizable
values when the advertising is aired.

  RECOGNITION OF CONTRACT COSTS

     Certain of the sales of network capacity referred to above involve the
Group constructing new capacity. Where the Group retains some of this new
capacity, either for subsequent resale or for use within the business, then an
element of the construction costs is retained within inventory or equipment,
respectively. The allocation of construction cost between costs expensed to the
statement of operations and costs capitalized within inventory or equipment is
based upon the ratio of capacity to be sold and to be retained.

  PENSION COSTS

     The Group operates a defined contribution scheme (the Telewest
Communications plc Pension Trust) or contributes to third-party schemes on
behalf of employees. The amount included in expenses in 2002, 2001 and 2000 of
L11 million, L10 million and L8 million, respectively, represents the
contributions payable to the selected schemes in respect of the relevant
accounting periods.

                                      IV-15
<PAGE>
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  INCOME TAXES

     Under the asset and liability method of SFAS 109 Accounting For Income
Taxes, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered.

     The Group recognises deferred tax assets only where it is more likely than
not that the benefit will be realized through future taxable income. Otherwise a
valuation allowance is established to provide against deferred tax assets.

  SHARE-BASED COMPENSATION

     SFAS 123, Accounting for Stock-Based Compensation, encourages, but does not
require, companies to record compensation costs for share-based employee
compensation plans at fair value. The Group has chosen to continue to account
for share-based compensation using the intrinsic value method prescribed in APB
25, Accounting for Stock Issued to Employees and related interpretations.
Accordingly, compensation cost for fixed plan share options is measured as the
excess, if any, of the quoted market price of the Company's shares at the date
of the grant over the amount an employee must pay to acquire the shares.
Compensation cost for variable plan share options is measured each period using
the intrinsic value method until the variable or performance features of the
plan become fixed. Compensation expense is recognized over the applicable
vesting period.

     Shares purchased by the trustees in connection with the Telewest Restricted
Share Scheme and certain LTIP awards, are valued at cost and are reflected as a
reduction of shareholders' equity in the consolidated balance sheet. This equity
account is reduced when the shares are issued to employees based on the original
cost of the shares to the trustees.

  EARNINGS PER SHARE

     Basic earnings per share has been computed by dividing net loss available
to ordinary shareholders by the weighted average number of ordinary shares
outstanding during the year. Diluted earnings per share is computed by adjusting
the weighted average number of ordinary shares outstanding during the year for
all dilutive potential ordinary shares outstanding during the year and adjusting
the net loss for any changes in income or loss that would result from the
conversion of such potential ordinary shares. There is no difference in net loss
and number of shares used for basic and diluted net loss per ordinary share, as
potential ordinary share equivalents for employee share options and convertible
debt are not included in the computation as their effect would be to decrease
the loss per share. The number of potential ordinary shares was 393 million, 393
million and 464 million in 2002, 2001 and 2000, respectively.

  INVENTORIES

     Inventories of equipment, held for use in the maintenance and expansion of
the Group's telecommunications systems, are stated at cost, including
appropriate overheads, less provision for deterioration and obsolescence.
Network capacity and ducting held for resale are stated at the lower of cost and
net realizable value.

  NEW ACCOUNTING STANDARDS APPLICABLE TO THE GROUP

  SFAS 143 Accounting for Asset Retirement Obligations

     In July 2001, the FASB issued SFAS 143, Accounting for Asset Retirement
Obligations. SFAS 143, which is effective for fiscal years beginning after June
15, 2002, requires entities to record the fair value of a liability for an asset
retirement obligation in the period in which it is incurred. When the liability
is initially
                                      IV-16
<PAGE>
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

recorded, an entity capitalizes a cost by increasing the carrying amount of the
related long-lived asset. Over time, the liability is accreted to its present
value each period, and the capitalized cost is depreciated over the useful life
of the related asset. Upon settlement of the liability, an entity either settles
the obligation for its recorded amount or incurs a gain or loss upon settlement.

     Telewest has evaluated its legal retirement obligations in relation to all
of its tangible long-lived assets and specifically in relation to the buildings
that it occupies and its network assets. Buildings, which are held under
operating leases, do not specify a fixed refurbishment payment, but instead
specify a standard of physical restoration for which Telewest is responsible.
Telewest attempts to maintain properties on an ongoing basis to the standard
required by the lease and consequently would not expect to have significant
additional relevant obligations in respect of its leased properties. Also
Telewest believes that it has no legal or constructive retirement obligations in
relation to its network assets, all located in the United Kingdom, as there is
no legal requirement for Telewest to retire such assets. The Group does not
therefore believe the adoption of SFAS 143 will have a material impact on the
financial statements.

  SFAS 145 Rescission of FASB Statements 4, 44 and 64, Amendment of FASB 13, and
  Technical Corrections

     In April 2002, the FASB issued SFAS 145, "Rescission of FASB Statements 4,
44 and 64, Amendment of FASB 13, and Technical Corrections". SFAS 145 provides
for the rescission of several previously issued accounting standards, new
accounting guidance for the accounting for certain lease modifications and
various technical corrections that are not substantive in nature to existing
pronouncements. The Group has adopted this standard from January 1, 2002 and
reclassified L15 million from extraordinary items to expense for the year ended
December 31, 2001. No material adjustments have been required in 2002.

  SFAS 146 Accounting for Costs Associated with Exit or Disposal Activities

     In June 2002, the FASB issued SFAS 146, "Accounting for Costs Associated
with Exit or Disposal Activities". SFAS 146 is effective for exit or disposal
activities that are initiated after December 31, 2002, and nullifies Emerging
Issues Task Force ("EITF") Issue No. 94-3 "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)". SFAS 146 applies to costs
associated with an exit activity that do not involve an entity newly acquired in
a business combination or with a disposal activity covered by SFAS 144
"Accounting for the Impairment or Disposal of Long-Lived Assets". The Group does
not believe the adoption of this statement will have a material impact on its
financial position or results of operations.

  SFAS 148 Accounting for Stock Based Compensation--Transition and Disclosure

     An amendment of SFAS 123 is effective for the Group for the year ended
December 31, 2002. SFAS 148 permits two additional transition methods for
entities that adopt the fair value based method of accounting for stock-based
employee compensation. The Statement also requires new disclosures about the
ramp-up effect of stock-based employee compensation on reported results and that
those effects be disclosed more prominently by specifying the form, content, and
location of those disclosures. The Group has adopted the disclosure provisions
of the Statement in these financial statements. The Group has not adopted the
fair value based method of accounting for stock-based employee compensation and
still accounts for these in accordance with APB Opinion 25, Accounting for Stock
Issued to Employees.

  Other New Standards

     In November 2002, the Emerging Issues Task Force issued its consensus on
EITF 00-21, Revenue Arrangements with Multiple Deliverables (EITF 00-21) on an
approach to determine whether an entity should divide an arrangement with
multiple deliverables into separate units of accounting. According to the EITF,
in an arrangement with multiple deliverables, the delivered item(s) should be
considered a separate

                                      IV-17
<PAGE>
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

unit of accounting if all of the following criteria are met: (1) the delivered
item(s) has value to the customer on a standalone basis, (2) there is objective
and reliable evidence of the fair value of the undelivered item(s), and (3) if
the arrangement includes a general right of return, delivery or performance of
the undelivered item(s) is considered probable and substantially in the control
of the vendor. If all the conditions above are met and there is objective and
reliable evidence of fair value for all units of accounting in an arrangement,
the arrangement consideration should be allocated to the separate units of
accounting based on their relative fair values. The guidance in this Issue is
effective for revenue arrangements entered into in fiscal years beginning after
June 15, 2003. The Group believes that the adoption of EITF 00-21 will not have
a material impact on the Group's financial statements.

     In November 2002, the FASB issued FASB Interpretation 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others ("FIN 45"), which addresses the disclosure
to be made by a guarantor in its financial statements about its obligations
under guarantees. FIN 45 also requires the recognition of a liability by a
guarantor at the inception of certain guarantees. It requires the guarantor to
recognize a liability for the non-contingent component of the guarantee, this is
the obligation to stand ready to perform in the event that specified triggering
events or conditions occur. The initial measurement of this liability is the
fair value of the guarantee at inception. The recognition of the liability is
required even it is not probable that payments will be required under the
guarantee or if the guarantee was issued with a premium payment or as part of a
transaction with multiple elements. The Group has adopted the disclosure
requirements and will apply the recognition and measurement provisions for all
guarantees entered into or modified after December 31, 2002. To date the Company
has not entered into or modified guarantees.

     In January 2003, the FASB issued FASB Interpretation 46, Consolidation of
Variable Interest Entities (FIN 46) which interprets Accounting Research
Bulletin (ARB) 51, Consolidated Financial Statements. FIN 46 clarifies the
application of ARB 51 with respect to the consolidation of certain entities
(variable interest entities--"VIEs") to which the usual condition for
consolidation described in ARB 51 does not apply because the controlling
financial interest in VIEs may be achieved through arrangements that do not
involve voting interests. In addition, FIN 46 requires the primary beneficiary
of VIEs and the holder of a significant variable interest in VIEs to disclose
certain information relating to their involvement with the VIEs. The provisions
of FIN 46 apply immediately to VIEs created after January 31, 2003, and to VIEs
in which an enterprise obtains an interest after that date. FIN 46 applies in
the first fiscal year beginning after June 15, 2003, to VIEs in which an
enterprise holds a variable interest that it acquired before February 1, 2003.
To comply with the transitional provisions of FIN 46, Telewest has evaluated its
existing structures to determine whether it is reasonably likely that it would
be required to consolidate or disclose information about a VIE's nature,
purpose, size and activities, together with Telewest's maximum exposure to loss.
Telewest is also required to disclose the anticipated impact of adoption of FIN
46 on its financial statements.

     Telewest has 50% joint venture interests in two affiliates, UKTV, a joint
venture with the BBC, and Front Row Television Limited ("Front Row"), a joint
venture with NTL, both of which are accounted for under the equity method, and
neither of which are considered VIEs. Management believes that both UKTV and
Front Row are businesses as defined by EITF 98-3, Determining Whether a
Nonmonetary Transaction Involves Receipt of Productive Assets or of a Business,
and FIN 46, Consolidation of Variable Interest Entities (Revised December 2003),
and, accordingly, does not consider that either consolidation or additional
disclosures are required. Telewest does not otherwise make use of traditional
VIE structures in its business and does not currently securitize its receivables
or other financial assets. The Group does not therefore believe that the impact
of the adoption of FIN 46 will have a material effect on its financial
statements.

5  FINANCIAL INSTRUMENTS

     The Group holds derivative financial instruments solely to hedge specific
risks and does not hold such instruments for trading purposes. The derivatives
are held to hedge against the variability in cash flows arising

                                      IV-18
<PAGE>
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

from the effect of fluctuations of GBP:USD exchange rate on the Group's US
Dollar-denominated debt and from changes in interest rates on its variable rate
bank debt.

     The Group maintains risk management control systems to monitor currency
exchange and interest rate risk attributable to forecasted debt principal
payments and interest rate exposure.

  CASH FLOW HEDGES

  Hedges of US Dollar Denominated Debt

     The Group has issued US Dollar denominated debt instruments with a range of
maturities. The Group previously hedged the principal amounts of these
instruments up to their first call dates or other such dates where the Group may
at its option redeem the instrument before maturity.

     The Group has increased its foreign exchange risk since the discontinuation
of hedge accounting as described below. The Group continues to monitor this risk
until the Financial Restructuring is complete when the US Dollar-denominated
debt instruments will be swapped for equity and the foreign exchange risk is
minimised.

     In the three-month period ended March 31, 2002, the Group determined that
it was probable that forecasted future prepayments of principal against
outstanding US Dollar-denominated debt would not occur. Accordingly, the
cumulative adjustment in OCI of L53 million resulting from marking to market the
derivative instruments has been reclassified from OCI to foreign exchange gains
in the Statement of Operations. Subsequent adjustments of the carrying value of
these instruments to fair value are taken directly to the Statement of
Operations as incurred.

     In the nine-month period ended September 30, 2002, the Group had the
ability to terminate in-the-money derivative contracts that fluctuate in value.
Such derivative contracts hedged our exposure to fluctuations in the US
Dollar/pound sterling exchange rates on the Group's US Dollar-denominated debt.
In March 2002, the Group terminated certain of these derivative contracts with a
nominal value of $999 million (L688 million), netting L74 million cash inflow.
In May 2002 the Group terminated further derivative contracts with a nominal
value of $367 million (L253 million) realizing an additional L30 million cash
inflow. In the three-month period ended September 30, 2002, the Group terminated
arrangements with a nominal value of $2.3 billion (approximately L1.5 billion).
Contracts with a nominal value of $1 billion were settled in cash resulting in
an outflow of L28 million. The remaining contracts with a nominal value of $1.3
billion have yet to be settled for a total cost of L33 million of which L19
million was due on October 1, 2002, but the Company deferred such payment and is
considering the payment in the context of its Financial Restructuring.

     During the 12-month period ended December 31, 2002, the Group recorded a
net L48 million transfer from cumulative OCI to the Statement of Operations
arising from the dedesignation of derivative contracts as ineffective hedges, as
described above. In the 12-month period ended December 31, 2001, the Group
recorded a L36 million gain in fair value to cumulative OCI, consisting of a
loss of L25 million to short-term derivative liabilities and a L61 million gain
to long-term derivative assets.

                                      IV-19
<PAGE>
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  HEDGES OF VARIABLE RATE DEBT

     As described in note 16 to the consolidated financial statements, the Group
has a Senior Secured Facility with a syndicate of banks and a further amount
from an Institutional Tranche ("Institutional Tranche"). Drawdowns under the
Senior Secured Facility and the Institutional Tranche bear interest at 0.75% to
2.00% above LIBOR and up to 4% above LIBOR respectively, so the Group is exposed
to variable cash flows arising from changes in LIBOR. The Group hedges these
variable cash flows by the use of interest rate swaps. The interest rate swaps
can be summarised as follows:

<Table>
<Caption>
                                              NOTIONAL
   EFFECTIVE DATES          MATURITIES        PRINCIPAL     RECEIVES           PAYS
---------------------  --------------------   ---------   -------------   --------------
<S>                    <C>                    <C>         <C>             <C>
1/2/1997-7/1/2002....  12/31/2003-3/31/2005     L900m     6-month LIBOR   5.475%-7.3550%
</Table>

     In June 2002, the Group reviewed the effectiveness as hedges of the
derivative instruments hedging our exposure to fluctuations in interest rates on
its long-term bank debt. The review concluded that continued designation of
these instruments as hedges was no longer appropriate and hedge accounting was
discontinued with immediate effect. The dedesignation of these instruments as
hedges resulted in a transfer of L7 million from cumulative OCI to interest
expense within the Statement of Operations. Any movements in the value of the
derivatives after June 2002 are recorded within interest expense.

     The Group continues to hedge some of its interest rate risk on its Senior
Secured Facility through the use of interest rate swaps. The purpose of the
derivative instruments is to provide a measure of stability over the Company's
exposure to movements in sterling interest rates on its sterling denominated
bank debt.

  FAIR VALUE OF FINANCIAL INSTRUMENTS

     SFAS 107, Disclosures about Fair Value of Financial Instruments requires
disclosure of an estimate of the fair values of financial instruments. SFAS 107
defines the fair value of a financial instrument as the amount at which the
instrument could be exchanged in a current transaction between willing parties
other than in a forced sale. Fair value estimates are made at a specific point
in time, based on relevant market information and information about the
financial instrument. These estimates are subjective in nature and involve
uncertainties and matters of significant judgement, and therefore cannot be
determined precisely. Changes in assumptions could significantly affect the
estimates.

                                      IV-20
<PAGE>
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     At December 31, 2002 the Group's significant financial instruments include
cash and cash equivalents, trade receivables, interest rate swaps, trade
payables and short-term and long-term debt instruments. The following table
summarizes the fair value of certain instruments held by and obligations of the
Group. The fair value of the other financial instruments held by the Group
approximates their recorded carrying amount due to the short maturity of these
instruments and these instruments are not presented in the following table:

<Table>
<Caption>
                                                AT DECEMBER 31, 2002     AT DECEMBER 31, 2001
                                               ----------------------   ----------------------
                                               CARRYING                 CARRYING
                                                AMOUNT     FAIR VALUE    AMOUNT     FAIR VALUE
                                               L MILLION   L MILLION    L MILLION   L MILLION
                                               ---------   ----------   ---------   ----------
<S>                                            <C>         <C>          <C>         <C>
FINANCIAL INSTRUMENTS--ASSETS
Foreign exchange forward contracts...........       --          --          131         131
Foreign currency swaps.......................       --          --           15          15
                                                 -----       -----        -----       -----
FINANCIAL INSTRUMENTS--LIABILITIES
Interest rate swap agreements................      (34)        (34)         (25)        (25)
Foreign exchange forward contracts...........       --          --           (4)         (4)
                                                 -----       -----        -----       -----
DEBT OBLIGATIONS
Accreting Convertible Notes 2003.............      282          62          268         268
Senior Convertible Notes 2005................      311         130          344         234
Senior Debentures 2006.......................      186          39          206         155
Senior Convertible Notes 2007................      300          63          300         174
Senior Discount Debentures 2007..............      955         200        1,059         803
Senior Notes 2008............................      217          46          226         185
Senior Discount Notes 2009...................      563         108          505         308
Senior Notes 2010............................      394          83          378         315
Senior Discount Notes 2010...................      222          46          185         136
Senior Secured Facility......................    2,000       2,000        1,360       1,360
Other debt...................................       20          20           66          66
                                                 -----       -----        -----       -----
</Table>

     The estimated fair values of the financial instruments specified above are
based on quotations received from independent, third-party financial
institutions and represent the net amounts receivable or payable to terminate
the position. The estimated fair values of the Debentures and Notes are also
based on quotations from independent third-party financial institutions and are
based on discounting the future cash flows to net present values using
appropriate market interest rates prevailing at the year end.

  MARKET RISK AND CONCENTRATIONS OF CREDIT RISK

     Market risk is the sensitivity of the value of the financial instruments to
changes in related currency and interest rates.

     As described above, the Group terminated its portfolio of derivative
financial instruments which were used to hedge its exposure to fluctuations in
the USD : GBP exchange rate. Consequently the Group is exposed to fluctuations
in the value of its US Dollar-denominated debt obligations.

     Generally, the Group is not exposed to such market risk arising on its
interest rate derivative financial instruments because gains and losses on the
underlying assets and liabilities offset gains and losses on the financial
instruments.

     The Group may be exposed to potential losses due to the credit risk of
non-performance by the financial institution counterparties to its portfolio of
derivative financial instruments. However such losses are not anticipated as
these counterparties are major international financial institutions and the
portfolio is spread over a wide range of institutions.

     Temporary cash investments also potentially expose the Group to
concentrations of credit risk, as defined by SFAS 133. At December 31, 2002 the
Group had L160 million on deposit with a major international

                                      IV-21
<PAGE>
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

financial institution. Concentrations of credit risk with respect to trade
receivables are limited due to the large number of customers comprising the
Group's customer base.

6  IMPAIRMENT OF ASSETS AND GOODWILL

     During the year ended December 31, 2002, the Group undertook an impairment
review of its network assets, of goodwill arising on recent acquisitions and of
its investments in affiliates acquired in recent years. The review covered the
Cable and Content Divisions. The principal reasons for the review were: a share
price decline indicative of a fall in the values of the underlying assets and a
softening of the ad-sales market, declining revenue growth and a lower than
expected customer take-up of additional services.

     The review found evidence of impairment in the value of goodwill arising on
the core Cable and Content business and in the value of the affiliated
undertaking UKTV. The carrying amounts of goodwill, fixed assets and the
investments in the affiliated undertakings were written down to fair value,
resulting in a charge of L1,445 million against goodwill, an impairment of L841
million against fixed assets and a charge of L88 million against the investments
in affiliated undertakings. These charges have been included in the statement of
operations within impairment of goodwill, impairment of fixed assets and share
of net losses of affiliates and impairment, respectively. The estimated fair
value of the goodwill and the investment in UKTV was based on projected future
cash flows at a post-tax discount rate of 11.5% which the Group believes is
commensurate with the risks associated with the assets. The projected future
cash flows were determined using the Company's ten-year plan for the business,
with a terminal value which takes into account analysts' and other published
projections of future trends across pay-TV platforms, including the total
television advertising market.

     The changes in the carrying amount of goodwill for the years ended December
31, 2002 and 2001 by reportable segment are as follows:

<Table>
<Caption>
                                                            CABLE      CONTENT      TOTAL
                                                          L MILLION   L MILLION   L MILLION
                                                          ---------   ---------   ---------
<S>                                                       <C>         <C>         <C>
Balance as of January 1, 2001...........................    1,394       1,409       2,803
Addition in year........................................       11          --          11
Amortization in year....................................      (83)        (73)       (156)
Impairment of goodwill..................................       --        (766)       (766)
                                                           ------       -----      ------
Balance as of January 1, 2002...........................    1,322         570       1,892
Impairment of goodwill..................................   (1,016)       (429)     (1,445)
                                                           ------       -----      ------
Balance as of December 31, 2002.........................      306         141         447
                                                           ======       =====      ======
</Table>

     Amortization expense related to goodwill was L183 million (including L27
million related to equity investment goodwill) for the year ended December 31,
2001 (L147 million for the year ended December 31, 2000). The following table
reconciles previously reported net income as if the provisions of SFAS 142 were
in effect in 2001 and 2000:

<Table>
<Caption>
                                                            2002
                                                          RESTATED      2001        2000
                                                          L MILLION   L MILLION   L MILLION
                                                          ---------   ---------   ---------
<S>                                                       <C>         <C>         <C>
Net loss
  Reported net loss.....................................   (2,789)     (1,741)      (755)
  Add back amortization of goodwill.....................       --         183        147
                                                           ------      ------       ----
Adjusted net loss.......................................   (2,789)     (1,558)      (608)
                                                           ======      ======       ====
</Table>

                                      IV-22
<PAGE>
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<Table>
<Caption>
                                                            PENCE       PENCE       PENCE
                                                          ---------   ---------   ---------
<S>                                                       <C>         <C>         <C>
Basic and diluted net loss per share
  Reported net loss per share...........................      (97)        (60)        (28)
  Add back amortization of goodwill.....................       --           6           5
                                                           ------       -----      ------
Adjusted net loss per share.............................      (97)        (54)        (23)
                                                           ======       =====      ======
</Table>

7  BUSINESS COMBINATIONS

     On May 30, 2001, the Group acquired 51% of the issued share capital of
Rapid Travel Solutions Limited ("Rapid Travel") and was granted a series of call
options by, and granted a series of put options to, the vendors in respect of
the balance of 49%. Assuming that either party exercises these options, the
Group will acquire the remainder of the share capital in tranches ending on
November 30, 2003 for total consideration of L4 million. The acquisition has
been accounted for using the purchase method of accounting. Goodwill arising on
the acquisition was L7 million.

     If the Group had acquired Rapid Travel at the beginning of 2000 and 2001,
the Group's results would not have been materially different from the actual
results as disclosed in these financial statements.

     On April 19, 2000 the Company acquired the entire issued share capital of
Flextech Plc ("Flextech"), a company engaged in broadcast media activities, for
a total consideration of L1,978 million. This comprised 601 million shares of
10p each and acquisition costs of L31 million. The value attributed to the
shares issued was 323.85 pence per share, being the average share market price
for a five day period around December 17, 2000, the day the terms of the
acquisitions were agreed to and announced. The acquisition was accounted for
using the purchase method of accounting. The goodwill arising on acquisition of
Flextech was L1,382 million. As described in note 16, the Group has undertaken
an impairment review of goodwill. As a result of the review, a charge of L429
million has been made.

     On November 1, 2000 the Company acquired the entire issued share capital of
Eurobell (Holdings) PLC ("Eurobell"), from Deutsche Telekom ("DT") and agreed to
pay initial and deferred consideration to DT, (as discussed below), in the form
of 5% Accreting Convertible Notes due 2003. The aggregate principal amount of
such Notes, following agreement of the deferred consideration is L254 million.
The terms of the Accreting Convertible Notes are described in note 16 to these
financial statements.

     Upon completion of the acquisition, the Company issued a L220 million
Accreting Convertible Note to DT in consideration for:

     - Eurobell's entire issued share capital, L72 million

     - the assignment of an inter-company loan previously owed by Eurobell to
       DT, L128 million, and

     - a cash payment remitted to Eurobell by DT shortly after the acquisition,
       L20 million.

     Subsequently, on January 15, 2001 DT remitted a further cash payment, L30
million, to Eurobell and the Company issued an additional Accreting Convertible
Note to DT for L30 million.

     In addition under the terms of the acquisition, the Company was obliged to
provide deferred consideration, contingent on Eurobell's turnover for the year
ended December 31, 2000 exceeding a certain target. As a result, an additional
L3.5 million Accreting Convertible Note, dated April 2, 2001 was issued to DT.
This deferred consideration was accrued for at December 31, 2000.

     Goodwill of L1 million arose on the acquisition.

     If the Company had acquired Flextech and Eurobell on January 1, 2000 the
Group's net loss of L755 million and loss per share of L0.28 would have been
L820 million and L0.28, respectively.

                                      IV-23
<PAGE>
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

8  SUPPLEMENTAL DISCLOSURES TO CONSOLIDATED STATEMENTS OF CASH FLOWS

     Cash paid for interest was L287 million, L335 million and L164 million for
the years ended December 31, 2002, 2001 and 2000, respectively.

     During 2002 there were no significant non-cash investing activities. The
amounts stated for 2001 represent the purchase of Rapid Travel. The amounts
stated for 2000 represent the purchase of Flextech and Eurobell. These
transactions are described in note 7 to the consolidated financial statements.

<Table>
<Caption>
                                                               YEAR ENDED DECEMBER 31
                                                          ---------------------------------
                                                            2002        2001        2000
                                                          L MILLION   L MILLION   L MILLION
                                                          ---------   ---------   ---------
<S>                                                       <C>         <C>         <C>
Acquisitions:
Assets..................................................       --           1       1,104
Liabilities assumed.....................................       --          (2)       (172)
Debt assumed............................................       --          --        (261)
                                                            -----       -----       -----
Net (liabilities)/assets (contributed)/assumed..........       --          (1)        671
Less:
Goodwill arising........................................       --           7       1,383
                                                            -----       -----       -----
                                                               --           6       2,054
                                                            -----       -----       -----
Share consideration/capital contribution................       --          --       1,946
Debt consideration......................................       --          --          75
Purchase of shares......................................       --           2          --
Option consideration....................................       --           4          --
Direct costs of acquisition.............................       --          --          33
                                                            -----       -----       -----
                                                               --           6       2,054
                                                            -----       -----       -----
</Table>

     In 2002 the Group entered into capital lease obligations with a total
capital value of L17 million. The Group entered into no vendor financing
arrangements during the year, but had a remaining financed balance of L11
million at December 31, 2002. At December 31, 2002, the Group had accrued a
further L57 million of capital expenditure for property and equipment.

9  OTHER RECEIVABLES

<Table>
<Caption>
                                                                 AT DECEMBER 31
                                                              ---------------------
                                                                2002        2001
                                                              L MILLION   L MILLION
                                                              ---------   ---------
<S>                                                           <C>         <C>
Interconnection receivables.................................        7           2
Accrued income..............................................       32          68
Other.......................................................       29          27
Foreign currency swap.......................................       --          15
                                                                -----       -----
                                                                   68         112
                                                                =====       =====
</Table>

     Accrued income primarily represents telephone calls made by Cable Division
subscribers and Business Services Division customers that have not been billed
as at the accounting period end. The period of time over which billings have not
been billed varies between two days and four weeks.

                                      IV-24
<PAGE>
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

10  INVESTMENTS

     The Group has investments in affiliates accounted for under the equity
method at December 31, 2002 and 2001 as follows:

<Table>
<Caption>
                                                               PERCENTAGE
                                                              OWNERSHIP AT
                                                              DECEMBER 31
                                                              ------------
                                                              2002    2001
                                                              -----   ----
<S>                                                           <C>     <C>
Front Row Television Limited................................   50.0%  50.0%
UKTV........................................................   50.0%  50.0%
Blue Yonder Workwise Limited................................  100.0%  70.0%
SMG.........................................................     --   16.9%
                                                              -----   ----
</Table>

     During the year Blue Yonder Workwise Limited became a wholly owned
subsidiary of the Group. No goodwill arose on the acquisition.

     Summarized combined financial information for such affiliates which operate
principally in the cable television, broadcasting and interactive media
industries is as follows:

<Table>
<Caption>
                                                                 AT DECEMBER 31
                                                              ---------------------
                                                                2002        2001
                                                              L MILLION   L MILLION
                                                              ---------   ---------
<S>                                                           <C>         <C>
COMBINED FINANCIAL POSITION
Current assets..............................................      61         162
Property and equipment, net.................................      --          54
Intangible assets, net......................................      --         112
Other assets, net...........................................      31           7
                                                                ----        ----
Total assets................................................      92         335
                                                                ----        ----
Current liabilities.........................................      42         133
Debt........................................................     176          66
Other liabilities...........................................      --         557
Owners' equity..............................................    (126)       (421)
                                                                ----        ----
Total liabilities and equity................................      92         335
                                                                ====        ====
</Table>

<Table>
<Caption>
                                                               YEAR ENDED DECEMBER 31
                                                          ---------------------------------
                                                            2002        2001        2000
                                                          L MILLION   L MILLION   L MILLION
                                                          ---------   ---------   ---------
<S>                                                       <C>         <C>         <C>
COMBINED OPERATIONS
Revenue.................................................     128         408         406
Operating expenses......................................    (103)       (324)       (343)
                                                            ----        ----        ----
Operating profit........................................      25          84          63
Interest expense........................................     (12)        (38)        (30)
                                                            ----        ----        ----
Net profit..............................................      13          46          33
                                                            ====        ====        ====
</Table>

<Table>
<Caption>
                                                                 AT DECEMBER 31
                                                              ---------------------
                                                                2002        2001
                                                              L MILLION   L MILLION
                                                              ---------   ---------
<S>                                                           <C>         <C>
THE GROUP'S INVESTMENTS IN AFFILIATES ARE COMPRISED AS
  FOLLOWS:
Goodwill....................................................      --          27
Loans.......................................................     208         260
Share of net assets.........................................     168         260
                                                                 ---         ---
                                                                 376         547
                                                                 ===         ===
</Table>

                                      IV-25
<PAGE>
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     On September 4, 2002 the investment in SMG plc, a listed investment in an
associated undertaking, was reclassified as a current asset investment at net
realizable value. This resulted in L42 million being written off the carrying
value of the investment. The investment in SMG plc was subsequently sold in
November 2002 realizing a gain of L1 million.

11  PROPERTY AND EQUIPMENT

<Table>
<Caption>
                                                    CABLE AND   ELECTRONIC     OTHER
                              LAND      BUILDINGS    DUCTING    EQUIPMENT    EQUIPMENT     TOTAL
                            L MILLION   L MILLION   L MILLION   L MILLION    L MILLION   L MILLION
                            ---------   ---------   ---------   ----------   ---------   ---------
<S>                         <C>         <C>         <C>         <C>          <C>         <C>
ACQUISITION COSTS
Balance at January 1,
  2002....................       6         133        3,186       1,424         597        5,346
Additions.................      --           7          269         135          50          461
Disposals.................      --          (2)          --          --         (11)         (13)
                              ----         ---        -----       -----         ---        -----
Balance at December 31,
  2002....................       6         138        3,455       1,559         636        5,794
                              ----         ---        -----       -----         ---        -----
ACCUMULATED DEPRECIATION
Balance at January 1,
  2002....................      --          45          894         661         273        1,873
Charge for the year.......      --          10          159         223         103          495
Impairment................      --          39          678          90          34          841
Disposals.................      --          (2)          --          --         (11)         (13)
                              ----         ---        -----       -----         ---        -----
Balance at December 31,
  2002....................      --          92        1,731         974         399        3,196
                              ----         ---        -----       -----         ---        -----
2002 NET BOOK VALUE.......       6          46        1,724         585         237        2,598
                              ====         ===        =====       =====         ===        =====
ACQUISITION COSTS
Balance at January 1,
  2001....................       6         119        2,630       1,393         552        4,700
Additions.................      --          14          556          31          52          653
Disposals.................      --          --           --          --          (7)          (7)
                              ----         ---        -----       -----         ---        -----
Balance at December 31,
  2001....................       6         133        3,186       1,424         597        5,346
                              ----         ---        -----       -----         ---        -----
ACCUMULATED DEPRECIATION
Balance at January 1,
  2001....................      --          35          546         605         225        1,411
Charge for the year.......      --          10          348          56          55          469
Disposals.................      --          --           --          --          (7)          (7)
                              ----         ---        -----       -----         ---        -----
Balance at December 31,
  2001....................      --          45          894         661         273        1,873
                              ----         ---        -----       -----         ---        -----
2001 NET BOOK VALUE.......       6          88        2,292         763         324        3,473
                              ====         ===        =====       =====         ===        =====
</Table>

     Cable and ducting consists principally of civil engineering and fiber optic
costs. In addition, cable and ducting includes net book value of
pre-construction and franchise costs of L18 million and L14 million as of
December 31, 2002 and 2001, respectively. Electronic equipment includes the
Group's switching, headend and converter equipment. Other equipment consists
principally of motor vehicles, office furniture and fixtures and leasehold
improvements.

                                      IV-26
<PAGE>
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

12  VALUATION AND QUALIFYING ACCOUNTS

<Table>
<Caption>
                                                                    ADDITIONS
                                                                    CHARGED TO
                                      BALANCE AT   ACQUISITION OF   COSTS AND                 BALANCE AT
                                      JANUARY 1     SUBSIDIARIES     EXPENSES    DEDUCTIONS   DECEMBER 31
                                      L MILLION      L MILLION      L MILLION    L MILLION     L MILLION
                                      ----------   --------------   ----------   ----------   -----------
<S>   <C>                             <C>          <C>              <C>          <C>          <C>
2002  Deferred tax valuation             901             --            382           --          1,283
      allowances...................
      Allowance for doubtful
      accounts.....................       16             --             --           (4)            12
                                         ---             --            ---          ---          -----
2001  Deferred tax valuation             733             --            168           --            901
      allowances...................
      Allowance for doubtful
      accounts.....................       19             --              3           (6)            16
                                         ---             --            ---          ---          -----
2000  Deferred tax valuation             491             38            204           --            733
      allowances...................
      Allowance for doubtful
      accounts.....................       13              5             14          (13)            19
                                         ---             --            ---          ---          -----
</Table>

13  OTHER ASSETS

     The components of other assets, net of amortization and write offs, are as
follows:

<Table>
<Caption>
                                                                 AT DECEMBER 31
                                                              ---------------------
                                                                2002
                                                              RESTATED      2001
                                                              L MILLION   L MILLION
                                                              ---------   ---------
<S>                                                           <C>         <C>
Deferred financing costs of debentures......................     --          22
Deferred financing costs of Senior Secured Facility.........     29          36
                                                                 --          --
                                                                 29          58
                                                                 ==          ==
</Table>

     During the year L11 million of deferred financing costs of debentures were
written off in connection with bond debt default.

14  INVENTORY

<Table>
<Caption>
                                                                 AT DECEMBER 31
                                                              ---------------------
                                                                2002        2001
                                                              L MILLION   L MILLION
                                                              ---------   ---------
<S>                                                           <C>         <C>
Raw materials and consumables...............................     --           1
Inventories of spare capacity and duct held for resale......      4          36
Programming inventory.......................................     24          30
                                                                 --          --
                                                                 28          67
                                                                 ==          ==
</Table>

15  OTHER LIABILITIES

     Other liabilities are summarized as follows:

<Table>
<Caption>
                                                                 AT DECEMBER 31
                                                              ---------------------
                                                                2002
                                                              RESTATED      2001
                                                              L MILLION   L MILLION
                                                              ---------   ---------
<S>                                                           <C>         <C>
Deferred income.............................................     111         114
Accrued construction costs..................................      64          67
Accrued programming costs...................................      21          24
Accrued interconnect costs..................................      17          39
Accrued interest............................................     222         111
Accrued staff costs.........................................      10          35
Accrued expenses............................................      42          41
Other liabilities...........................................     146          93
                                                                 ---         ---
                                                                 633         524
                                                                 ===         ===
</Table>

                                      IV-27
<PAGE>
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

16  DEBT

     Debt is summarized as follows at December 31, 2002 and 2001:

<Table>
<Caption>
                                      WEIGHTED AVERAGE INTEREST RATE
                                      ------------------------------     2002        2001
                                        2002       2001       2000     L MILLION   L MILLION
                                      --------   --------   --------   ---------   ---------
<S>                                   <C>        <C>        <C>        <C>         <C>
Accreting Convertible Notes 2003....       5%         5%         5%        282         268
Senior Convertible Notes 2005.......       6%         6%         6%        311         344
Senior Debentures 2006..............   9.625%     9.625%     9.625%        186         206
Senior Convertible Notes 2007.......    5.25%      5.25%      5.25%        300         300
Senior Discount Debentures 2007.....      11%        11%        11%        955       1,059
Senior Notes 2008...................   11.25%     11.25%     11.25%        217         226
Senior Discount Notes 2009..........   9.875%     9.875%     9.875%        287         261
Senior Discount Notes 2009..........    9.25%      9.25%      9.25%        276         244
Senior Notes 2010...................   9.875%     9.875%     9.875%        394         378
Senior Discount Notes 2010..........  11.375%    11.375%    11.375%        222         185
Senior Secured Facility.............   6.223%     7.265%     7.553%      2,000       1,360
Other debt..........................     6.7%     6.767%     7.432%         20          66
                                      -------    -------    -------      -----       -----
                                                                         5,450       4,897
                                                                         =====       =====
</Table>

  NOTES AND DEBENTURES

<Table>
<Caption>
                                          PRINCIPAL AT
                                            MATURITY
                                            MILLION      ORIGINAL MATURITY DATE   EARLIEST REDEMPTION DATE   INTEREST RATE
                                          ------------   ----------------------   ------------------------   -------------
<S>                                 <C>   <C>            <C>                      <C>                        <C>
Accreting Convertible Notes
  2003............................  GBP        294          November 1, 2003          November 1, 2003               5%
Senior Convertible Notes 2005.....  USD        500              July 7, 2005              July 7, 2003               6%
Senior Debentures 2006............  USD        300           October 1, 2006           October 1, 2001           9.625%
Senior Convertible Notes 2007.....  GBP        300         February 19, 2007             March 9, 2003            5.25%
Senior Discount Debentures 2007...  USD      1,537           October 1, 2007           October 1, 2001              11%
Senior Notes 2008.................  USD        350          November 1, 2008          November 1, 2003           11.25%
Senior Discount Notes 2009........  GBP        325            April 15, 2009            April 15, 2004           9.875%
Senior Discount Notes 2009........  USD        500            April 15, 2009            April 15, 2004            9.25%
Senior Notes 2010.................  GBP        180          February 1, 2010          February 1, 2005           9.875%
Senior Notes 2010.................  USD        350          February 1, 2010          February 1, 2005           9.875%
Senior Discount Notes 2010........  USD        450          February 1, 2010          February 1, 2005          11.375%
</Table>

     The Debentures and Notes are unsecured liabilities of the Group.

     The Senior Convertible Notes 2005 are convertible into 114 million ordinary
shares of the Group at a conversion price of 288 pence per ordinary share.
Conversion is at the holders' option at any time up to the close of business on
June 22, 2005. The Senior Convertible Notes 2007 are convertible into 92 million
ordinary shares of the Group at a conversion price of 325 pence per ordinary
share. Conversion is at the holders' option at any time up to close of business
on February 2, 2007. If Notes are called for redemption prior to maturity, each
holder has the right to convert Notes into ordinary shares. The Accreting
Convertible Notes 2003 are convertible into 162 million ordinary shares of the
Group at an initial conversion price of 156.56 pence per ordinary share.
Conversion is at maturity at the holder's option, but the Group can elect to
settle in cash at any time, in whole but not in part, at 100% of the accreted
value provided that for a certain 10 day period prior to redemption, the price
per ordinary share has been at least 130% of the average conversion price in
effect on each day during the 10 day period.

     On January 15, 2001, DT remitted a cash payment of L30 million to its
former subsidiary Eurobell, under the terms of the acquisition of Eurobell by
the Company on November 1, 2000. In consideration the Company issued additional
Accreting Convertible Notes 2003 for the same amount. In addition, under the
terms of the acquisition, the Company was obliged to provide deferred
consideration, contingent on Eurobell's turnover for

                                      IV-28
<PAGE>
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

the year ended December 31, 2000 exceeding a certain target. As a result
additional L3.5 million Accreting Convertible Notes 2003, dated April 2, 2001,
were issued to DT.

     The unamortized portion of the discounts on issue of the Senior Discount
Notes 2009 and Senior Discount Notes 2010 was L73 million and L58 million
respectively. The discount on issue is being amortized up to the first call
dates of the bonds, such as to produce a constant rate of return on the carrying
amount.

     The indentures under which the Debentures and Notes were issued contain
various covenants, which among other things, restrict the ability of the Group
to incur additional indebtedness, pay dividends, create certain liens, enter
into certain transactions with shareholders or affiliates, or sell certain
assets. As part of its refinancing, the Group elected not to pay: the interest
due on October 1, 2002 on its Senior Debentures 2006 and its Senior Discount
Debentures 2007; the interest due on November 1, 2002 on its Senior Notes 2008;
and the interest due on January 7, 2003 on its Senior Convertible Notes 2005.
The non-payment of interest constitutes a default event under the terms of these
four bonds. As a consequence of the non-payment of hedge contracts of L10.5
million, all of the remaining bonds were also in default as at December 31,
2002.

  SENIOR SECURED FACILITY

     On March 16, 2001 the Group entered into a new senior secured credit
facility (the "Senior Secured Facility") with a syndicate of banks for L2
billion, of which L1,855 million was drawn down at December 31, 2002. The Group
is also able to raise a further L250m from institutional investors (the
"Institutional Tranche") of which L145 million was drawn down at December 31,
2002. The first drawdowns under the Senior Secured Facility were used to repay
amounts owed under the old senior secured credit facilities.

     Borrowings under the Senior Secured Facility are secured on the assets of
the Group including the partnership interests and shares of subsidiaries and
bear interest at 0.75% to 2.0% over LIBOR (depending on the ratio of borrowings
to quarterly, annualized, consolidated net operating cash flow). Borrowings
under the Institutional Tranche bear interest at up to 4% above LIBOR.

     The Senior Secured Facility contains cross default clauses with other debt
instruments. As a result of the Group being in default of its Debentures and
Notes, it is in default on the Senior Secured Facility. In addition, on March
14, 2003, Telewest notified its Senior Lenders that, as a result of the
exceptional items incurred in 2002 and their impact on Telewest's net operating
cash flow, it would breach certain financial covenants under its bank facility
in respect of the quarter ended December 31, 2002.

     The Group is renegotiating its bank facilities and debt financing
arrangements. Further details of the Financial Restructuring are included in
note 23.

  VENDOR FINANCING

     The Group has entered into vendor financing arrangements to fund its
purchase of equipment from certain suppliers. Under the terms of these
arrangements the Group defers payment for periods up to 36 months. Interest is
charged on these arrangements at a rate that is fixed for the life of the
arrangements. The balance on these arrangements at December 31, 2002 was L11
million.

  SMG LOAN

     On July 11, 2001, the Group entered into a contract with Toronto Dominion
Bank ("TD"), whereby TD provided a loan to the Group, in return for security
over 55% of the Group's shareholding in SMG plc. The loan was fully repaid
during the year following the sale of the Group's investment in SMG.

  BANK LOANS

     Bank loans are property loans secured on certain freehold land and
buildings held by the Group. The balance at December 31, 2002 was L7 million.

                                      IV-29
<PAGE>
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  MATURITY PROFILE

     As a consequence of the defaults referred to above, the Group's long-term
debt has been disclosed as repayable within one year. The original Maturity
Profile of the Group's long-term debt was as follows:

<Table>
<Caption>
                                                                 2002
                                                               L MILLION
                                                               ---------
<S>                                                            <C>
2003........................................................     3,652
2004........................................................         1
2005........................................................       316
2006........................................................        --
2007........................................................       300
2008 and thereafter.........................................     1,181
                                                                 -----
                                                                 5,450
                                                                 =====
</Table>

17  INCOME TAXES

     Loss before income taxes is solely attributable to the United Kingdom.

     The provisions for income taxes follow:

<Table>
<Caption>
                                                            2002        2001        2000
                                                          L MILLION   L MILLION   L MILLION
                                                          ---------   ---------   ---------
<S>                                                       <C>         <C>         <C>
Deferred tax benefit....................................     28          70           6
                                                             --          --           --
</Table>

     A reconciliation of income taxes determined using the statutory UK rate of
30% (2001: 30%) to the effective rate of income tax is as follows:

<Table>
<Caption>
                                                                  YEAR ENDED
                                                                 DECEMBER 31
                                                              ------------------
                                                              2002   2001   2000
                                                               %      %      %
                                                              ----   ----   ----
<S>                                                           <C>    <C>    <C>
Corporate tax at UK statutory rates.........................  (30)   (30)   (30)
Write down of goodwill......................................   12     --     --
Change in valuation allowance...............................   14     34     31
                                                              ---    ---    ---
                                                               (4)     4      1
                                                              ===    ===    ===
</Table>

     Deferred income tax assets and liabilities at December 31, 2002 and 2001
are summarized as follows:

<Table>
<Caption>
                                                                2002        2001
                                                              L MILLION   L MILLION
                                                              ---------   ---------
<S>                                                           <C>         <C>
Deferred tax assets relating to:
Fixed assets................................................      763        410
Net operating loss carried forward..........................      494        465
Other--investments..........................................       26         26
                                                               ------       ----
Deferred tax asset..........................................    1,283        901
Valuation allowance.........................................   (1,283)      (901)
Investments in affiliates...................................      (85)      (113)
                                                               ------       ----
DEFERRED TAX LIABILITY PER BALANCE SHEET....................      (85)      (113)
                                                               ======       ====
</Table>

     At December 31, 2002 the Group estimates that it has, subject to Inland
Revenue agreement, net operating losses ("NOLs") of L1,647 million available to
relieve against future profits. This excludes capital allowances on assets which
are available to the Group, but have not been claimed.

     A valuation allowance of 100% has been provided due to a history of
operating losses and management's belief that the likelihood of realizing the
benefit of the deferred tax asset is not more likely than not.

                                      IV-30
<PAGE>
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The NOLs have an unlimited carry forward period under UK tax law, but are
limited to their use to the type of business which has generated the loss.

18  SHAREHOLDERS' EQUITY

  MOVEMENT IN SHARE CAPITAL

     On March 31, 2000 the authorized share capital of the Company was increased
to L460 million divided into 4,300 million ordinary shares of 10 pence each and
300 million limited voting convertible ordinary shares of 10 pence each.

     Between May 5 and July 5, 2000 the Company issued 601 million ordinary
shares of 10 pence each in consideration for the entire issued share capital of
Flextech. Also in 2000, 4 million ordinary shares of 10 pence each were issued
in consideration of L4.6 million on exercise of employee share options.

     During 2001 the Company issued 7 million ordinary shares of 10 pence each
upon exercise of employee share options. Total consideration received was L6
million. In addition the Company redesignated 20 million ordinary shares of 10
pence each into 20 million limited voting convertible ordinary shares of 10
pence each.

  LIMITED VOTING CONVERTIBLE ORDINARY SHARES

     The ordinary shares and the limited voting convertible ordinary shares have
the same rights, except that the limited voting convertible ordinary shares do
not confer the right to vote on resolutions to appoint, reappoint, elect or
remove directors of Telewest. No application will be made for the limited voting
convertible ordinary shares to be listed or dealt in on any stock exchange.
Holders of limited voting convertible ordinary shares are entitled to convert
all or some of their limited voting convertible ordinary shares into fully paid
ordinary shares, provided that the conversion would not result in a change of
control of the Company for the purposes of the indentures governing certain
Notes and Debentures. The limited voting convertible ordinary shares are
convertible into ordinary shares at the Company's option at any time, subject to
certain conditions. The sole holders of the limited voting convertible ordinary
shares are Liberty Media and Microsoft.

     Members of the Liberty Media Group and/or the Microsoft Group can
redesignate all or any of their ordinary shares into limited voting convertible
ordinary shares. This is to ensure that, on any future purchase of ordinary
shares by members of the Microsoft Group and/or members of the Liberty Media
Group, they will, at that time, be able to re-designate such number of their
then existing holding of ordinary shares so as to avoid a change of control of
the Company for the purposes of the Notes and Debentures.

     Future purchases of ordinary shares and/or limited voting convertible
ordinary shares by members of the Liberty Media Group and/or the Microsoft Group
will, however, be subject to Rule 9 of the UK's City Code on Takeovers and
Mergers because both classes of shares are treated as voting shares for that
purpose. Under Rule 9, when any person acquires, whether by a series of
transactions over a period of time or not, shares which (taken together with
shares held or acquired by persons acting in concert with him) carry 30% or more
(but less than 50%) of the voting rights of a public company, that person is
normally required to make a general offer to shareholders for the entire share
capital of the company then in issue. Any person, or group of persons acting in
concert, owning shares carrying 50% or more of the voting rights of a public
company, subject to their own individual limits, is free to acquire further
shares in that public company without giving rise to the requirement to make a
general offer for the entire issued share capital of that company.

     In May 2001, Liberty Media increased its shareholding in the Company as a
result of the purchase of 20 million ordinary shares of 10 pence each. Prior to
the increase in shareholding, Liberty Media redesignated 20 million ordinary
shares of 10 pence each as limited voting convertible ordinary shares of 10
pence each. As a result Liberty Media and Microsoft's combined shareholdings
remained below 50% of the issued ordinary share capital, above which level a
change of control for the purposes of the Group's debt securities may occur.

                                      IV-31
<PAGE>
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

19  SHARE-BASED COMPENSATION PLANS

     At December 31, 2002, the Company operated five types of share-based
compensation plans: the Executive Share Option Schemes, the Sharesave Schemes,
the Telewest Restricted Share Scheme ("RSS"), the Telewest Long Term Incentive
Plan ("LTIP") and an Equity Participation Plan ("EPP").

     The Company applies APB 25 and related interpretations in accounting for
its share-based compensation plans. Compensation cost is recognized over the
estimated service period in respect of performance based share option grants to
the extent that the market value of the Company's ordinary shares exceeds the
exercise price at the earlier of the vesting date or the Balance Sheet date.
Compensation cost is recognized for awards over ordinary shares made under the
RSS since the awards have no exercise price. Compensation cost is recognized
over the estimated service period in respect of the LTIP to the extent that the
market value of the Company's ordinary shares exceeds the exercise price at the
earlier of the vesting date or the Balance Sheet date.

     Compensation cost recognized for share option grants and awards is as
follows:

<Table>
<Caption>
                                                            2002        2001        2000
                                                          L MILLION   L MILLION   L MILLION
                                                          ---------   ---------   ---------
<S>                                                       <C>         <C>         <C>
LTIP....................................................      (1)         --           5
Executive Share Option Scheme...........................      --           1           2
EPP.....................................................      --           1           1
                                                             ---         ---         ---
                                                              (1)          2           8
                                                             ===         ===         ===
</Table>

     During the year, no options or awards were granted over any ordinary shares
of the Company. If compensation costs for share option grants and awards under
the RSS, LTIP, Executive Option Schemes and EPP had been determined based on
their fair value at the date of grant for 2001 and 2000 consistent with the
method prescribed by SFAS 123, the Group's net loss and basic and diluted loss
per share would have been adjusted to the pro forma amounts set out below:

<Table>
<Caption>
                                                            2002
                                                          RESTATED      2001        2000
                                                          L MILLION   L MILLION   L MILLION
                                                          ---------   ---------   ---------
<S>                                                       <C>         <C>         <C>
Net loss
  as reported...........................................   (2,789)     (1,741)      (755)
  pro forma.............................................   (2,766)     (1,750)      (757)
                                                           ------      ------       ----
</Table>

<Table>
<Caption>
                                                            PENCE       PENCE       PENCE
                                                          ---------   ---------   ---------
<S>                                                       <C>         <C>         <C>
Basic and diluted loss per share
  as reported...........................................      (97)        (60)       (28)
  pro forma.............................................      (96)        (61)       (28)
                                                           ------      ------       ----
</Table>

     The fair value of each option grant in all plans was estimated as at the
date of grant using a Black-Scholes option-pricing model. The model used a
weighted-average, risk-free interest rate of 5.5% and 5.8% for grants in 2001
and 2000 respectively, and an expected volatility of 55% and 30%, respectively.
The Group does not expect to pay a dividend on its ordinary shares at any time
during the expected life of any outstanding option. The Group expects options to
be held until maturity.

  PERFORMANCE-BASED SHARE OPTION COMPENSATION PLANS

     The Group has two performance-based share option plans: the 1995 (No. 1)
Executive Share Option Scheme and the 1995 (No. 2) Executive Share Option
Scheme. Under both plans, certain officers and employees are granted options to
purchase ordinary shares of the Company. The exercise price of each option
generally equals the market price of the Company's ordinary shares on the date
of grant. The options are exercisable between three and ten years after the date
of the grant with exercise conditional on the Company's

                                      IV-32
<PAGE>
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

shares out-performing by price the FTSE100 Index over any three-year period
preceding exercise. The Company may grant options for up to 295 million ordinary
shares.

     A summary of the status of the Company's performance-based share option
plans as of December 31, 2002, 2001, and 2000 and changes during the years ended
on those dates are presented below:

<Table>
<Caption>
                                      2002                    2001                    2000
                                    WEIGHTED                WEIGHTED                WEIGHTED
                                    AVERAGE                 AVERAGE                 AVERAGE
                       NUMBER OF    EXERCISE   NUMBER OF    EXERCISE   NUMBER OF    EXERCISE
                         SHARES      PRICE       SHARES      PRICE       SHARES      PRICE
                       ----------   --------   ----------   --------   ----------   --------
<S>                    <C>          <C>        <C>          <C>        <C>          <C>
Outstanding at
  beginning of
  year...............  97,699,837    136.4p    52,503,409    173.2p    17,028,622    110.0p
Adjustments during
  the year...........          --        --            --        --     4,457,322    143.8p
Granted..............          --        --    53,709,994     98.8p    35,154,239    205.1p
Exercised............          --        --    (1,210,816)    78.2p    (2,501,964)   114.9p
Forfeited............  (7,642,594)   126.0p    (7,302,750)   134.3p    (1,634,810)   208.8p
                       ----------    ------    ----------    ------    ----------    ------
Outstanding at end of
  year...............  90,057,243    137.3p    97,699,837    136.4p    52,503,409    173.2p
                       ----------    ------    ----------    ------    ----------    ------
Options exercisable
  at year end........  36,358,298    141.4p    16,577,655    132.0p    14,938,772    129.8p
                       ----------    ------    ----------    ------    ----------    ------
Weighted average fair
  value of options
  granted during the
  year...............                    --                   69.7p                   33.9p
                                     ------                  ------                  ------
</Table>

     The adjustments during 2000 arose as a result of the transfer in of former
Flextech outstanding options.

     Share options are forfeited due to employees leaving the Group before their
share options become exercisable.

     The following table summarizes information about the Company's
performance-based share option plans outstanding at December 31, 2002.

<Table>
<Caption>
                                        OPTIONS OUTSTANDING
                               -------------------------------------      OPTIONS EXERCISABLE
                                  NUMBER       WEIGHTED                -------------------------
                               OUTSTANDING      AVERAGE     WEIGHTED       NUMBER       WEIGHTED
                                    AT         REMAINING    AVERAGE    EXERCISABLE AT   AVERAGE
                               DECEMBER 31,   CONTRACTUAL   EXERCISE    DECEMBER 31,    EXERCISE
RANGE OF EXERCISE PRICES           2002          LIFE        PRICE          2002         PRICE
------------------------       ------------   -----------   --------   --------------   --------
<S>                            <C>            <C>           <C>        <C>              <C>
65.7-76.8p...................   13,890,131      7.4yrs        74.2p       6,307,995       73.3p
81.5-82.5p...................    2,025,479      8.6yrs        81.7p         257,834       81.7p
84.6-99.9p...................    2,212,140      2.5yrs        89.2p       2,212,140       89.0p
102.0-109.1p.................   33,133,132      8.2yrs       103.8p      10,574,594      103.6p
114.0-125.9p.................   11,133,884      7.5yrs       119.2p       3,890,521      120.1p
130.4-142.9p.................      982,642      4.2yrs       139.1p         982,642      139.1p
160.0-170.0p.................    1,502,207      7.3yrs       166.2p         709,386      167.7p
202.4-235.0p.................   23,883,741      7.5yrs       229.4p      10,638,164      228.5p
237.3-249.4p.................      543,216      7.1yrs       239.7p         268,467      240.9p
274.3-276.5p.................      361,832      6.4yrs       276.4p         332,813      276.4p
289.0-294.8p.................      388,839      6.8yrs       291.2p         183,742      291.7p
                                ----------      ------       ------      ----------      ------
65.7-294.8p..................   90,057,243      7.6yrs       137.3p      36,358,298      141.4p
                                ==========      ======       ======      ==========      ======
</Table>

                                      IV-33
<PAGE>
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  FIXED SHARE OPTION COMPENSATION PLANS

     The Company also operates the Sharesave Scheme, a fixed share option
compensation scheme. Under this plan, the Company grants options to employees to
purchase ordinary shares at up to a 20% discount to market price. These options
can be exercised only with funds saved by employees over time in a qualified
savings account. The options are exercisable between 37 and 66 months after
commencement of the savings contracts.

     A summary of the status of the Company's fixed share option plan as of
December 31, 2002, 2001, and 2000 and the changes during the years ended on
those dates are presented below:

<Table>
<Caption>
                                            2002                          2001                          2000
                                          WEIGHTED                      WEIGHTED                      WEIGHTED
                          NUMBER OF       AVERAGE       NUMBER OF       AVERAGE       NUMBER OF       AVERAGE
                           SHARES      EXERCISE PRICE     SHARES     EXERCISE PRICE     SHARES     EXERCISE PRICE
                         -----------   --------------   ----------   --------------   ----------   --------------
<S>                      <C>           <C>              <C>          <C>              <C>          <C>
Outstanding at
  beginning of year....   21,519,334        80.5p       26,635,135        91.1p       11,679,289       116.9p
Adjustments during the
  year.................           --           --               --           --          654,868       126.2p
Granted................           --           --        9,205,135        60.3p       17,946,934        88.3p
Exercised..............           --           --       (4,380,809)       57.3p         (876,216)       98.1p
Forfeited..............  (12,550,048)       82.3p       (9,940,127)      100.4p       (2,769,740)      187.6p
                         -----------       ------       ----------       ------       ----------       ------
Outstanding at end of
  year.................    8,969,286        78.0p       21,519,334        80.5p       26,635,135        91.1p
                         -----------       ------       ----------       ------       ----------       ------
Options exercisable at
  year end.............       36,272       159.1p           72,926        98.0p        4,443,443        57.1p
                         -----------       ------       ----------       ------       ----------       ------
Weighted average fair
  value of options
  granted during the
  year.................           --           --               --        33.3p               --        39.1p
                         -----------       ------       ----------       ------       ----------       ------
</Table>

     The adjustments during 2000 arose as a result of the transfer in of former
Flextech outstanding options.

     Share options are forfeited due to employees leaving the Group before their
share options become exercisable.

     The following table summarizes information about the Company's fixed share
options outstanding at December 31, 2002:

<Table>
<Caption>
                                                                  OPTIONS OUTSTANDING
                                                           ---------------------------------
                                                               NUMBER           WEIGHTED
                                                           OUTSTANDING AT       AVERAGE
                                                            DECEMBER 31,       REMAINING
RANGE OF EXERCISE PRICES                                        2002        CONTRACTUAL LIFE
------------------------                                   --------------   ----------------
<S>                                                        <C>              <C>
58.5-88.3p...............................................    8,652,129           2.1yrs
103.9-115.9p.............................................       40,262           0.9yrs
128.6-161.9p.............................................       24,455           0.5yrs
191.0-236.5p.............................................      252,440           0.6yrs
                                                             ---------           ------
58.5-236.5p..............................................    8,969,286           2.0yrs
                                                             =========           ======
</Table>

  TELEWEST RESTRICTED SHARE SCHEME ("RSS")

     The Company operates the RSS in conjunction with an employment trust, the
Telewest 1994 Employees' Share Ownership Plan Trust (the "Telewest ESOP"), which
has been designed to provide incentives to executives of the Company. Under the
RSS, executives may be granted awards over ordinary shares of the Company based
on a percentage of salary. The awards are made for no monetary consideration.
The awards

                                      IV-34
<PAGE>
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

generally vest three years after the date of the award and are exercisable for
up to seven years after the date when they vest.

     The compensation charge related to each award is based on the share price
of the ordinary shares on the date the award was made.

     A summary of the status of the RSS at December 31, 2002, 2001, and 2000 and
changes during the years ended on those dates are presented below:

<Table>
<Caption>
                                                           2002        2001        2000
                                                          NUMBER      NUMBER      NUMBER
                                                         OF SHARES   OF SHARES   OF SHARES
                                                         ---------   ---------   ---------
<S>                                                      <C>         <C>         <C>
Outstanding at beginning of year.......................   530,855     358,316     576,333
Granted................................................        --     248,595          --
Exercised..............................................   (37,821)    (76,056)   (131,394)
Forfeited..............................................        --          --     (86,623)
                                                          -------     -------    --------
Outstanding at end of year.............................   493,034     530,855     358,316
                                                          -------     -------    --------
Awards exercisable at year end.........................   214,114      38,338      86,989
                                                          -------     -------    --------
Weighted average fair value of awards granted during
  the year.............................................        --      L 1.10          --
                                                          -------     -------    --------
</Table>

     Share awards are forfeited due to employees leaving the Group before their
awards become exercisable.

     At December 31, 2002, the 493,034 awards outstanding and the 214,114 awards
exercisable have weighted average remaining contractual lives of 7.4 years and
6.3 years respectively.

     Deferred compensation cost relating to RSS is L38,000 (2001: L478,000.)

  LONG TERM INCENTIVE PLAN ("LTIP")

     The LTIP provides for share awards to executive directors and senior
executives. Under the LTIP, an executive will be awarded the provisional right
to receive, for no payment, a number of Telewest shares with a value equating to
a percentage of base salary. The shares will not vest unless certain performance
criteria, based on total shareholder return assessed over a three-year period
are met. The percentage of salary will be determined by the Remuneration
Committee and will be up to 100% of base salary for executive directors.

     A summary of the status of the LTIP at December 31, 2002, 2001, and 2000
and changes during the years ended on those dates are presented below:

<Table>
<Caption>
                                                      2002         2001         2000
                                                   NUMBER OF    NUMBER OF    NUMBER OF
                                                     SHARES       SHARES       SHARES
                                                   ----------   ----------   ----------
<S>                                                <C>          <C>          <C>
Outstanding at beginning of year.................   1,566,507    2,714,552    4,005,075
Granted..........................................          --      910,730      816,175
Exercised........................................     (29,502)  (1,220,362)  (1,152,826)
Forfeited........................................  (1,113,733)    (838,413)    (953,872)
                                                   ----------   ----------   ----------
Outstanding at end of year.......................     423,272    1,566,507    2,714,552
                                                   ----------   ----------   ----------
Awards exercisable at year end...................     108,569      265,939    1,058,542
                                                   ----------   ----------   ----------
Weighted average fair value of awards granted
  during the year................................          --       L 1.09       L 0.24
                                                   ----------   ----------   ----------
</Table>

     Share awards are forfeited due to employees leaving the Group before their
share options become exercisable or due to performance criteria not being met.

     Deferred compensation cost relating to the LTIP is Lnil (2001: L189,000.)

                                      IV-35
<PAGE>
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  EQUITY PARTICIPATION PLAN ("EPP")

     The Remuneration Committee has provided that, under the EPP, an employee
with two years service or at manager level or above, can use up to 100% of the
Short Term Incentive Plan ("STIP") bonus payable to the employee to acquire
Telewest shares ("bonus shares"). The employee must deposit the bonus shares
with the Trustee of the existing Telewest ESOP. In return, the employee is
provisionally allocated for no payment a matching number of Telewest shares.
Provided the bonus shares are retained for three years and the employee remains
employed for three years, the bonus and matching shares would thereafter be
released to the employee.

     A summary of the status of the Company's EPP at December 31, 2002, 2001,
and 2000 and the changes during the years ended on those dates are presented
below:

<Table>
<Caption>
                                                        2002        2001        2000
                                                      NUMBER OF   NUMBER OF   NUMBER OF
                                                       SHARES      SHARES      SHARES
                                                      ---------   ---------   ---------
<S>                                                   <C>         <C>         <C>
Outstanding at beginning of year....................   572,053    1,193,839   1,074,150
Granted.............................................        --           --     267,524
Exercised...........................................  (256,790)    (579,430)   (130,576)
Forfeited...........................................    (9,693)     (42,356)    (17,259)
                                                      --------    ---------   ---------
Outstanding at end of year..........................   305,570      572,053   1,193,839
                                                      --------    ---------   ---------
Awards exercisable at year end......................   123,168       26,443     288,253
                                                      --------    ---------   ---------
Weighted average fair value of awards granted during
  the year..........................................        --           --      L 2.49
                                                      --------    ---------   ---------
</Table>

     Share awards are forfeited due to employees leaving the Group before their
share options become exercisable.

     Deferred compensation cost relating to the EPP is L80,000 (2001: L419,000.)

20  ACCUMULATED OTHER COMPREHENSIVE INCOME

<Table>
<Caption>
                                                   2002 GAINS/(LOSSES)   2001 GAINS/(LOSSES)
                                                    ON MARK TO MARKET     ON MARK TO MARKET
                                                      OF CASH FLOW          OF CASH FLOW
                                                    HEDGES L MILLION      HEDGES L MILLION
                                                   -------------------   -------------------
<S>                                                <C>                   <C>
Balance at January 1.............................           37                    --
Cumulative effect of accounting change...........           --                   (16)
Amounts reclassified into earnings...............          (48)                   (5)
Current period increase in fair value............           --                    57
Unrealised gain on deemed partial disposal of
  investment.....................................           --                     1
                                                           ---                   ---
Balance at December 31...........................          (11)                   37
                                                           ===                   ===
</Table>

     The amounts reclassified into earnings are detailed in note 5.

21  COMMITMENTS AND CONTINGENCIES

  RESTRICTED CASH

     At December 31, 2002, the Group has cash restricted as to use of L12
million which provides security for leasing obligations.

                                      IV-36
<PAGE>
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  OTHER COMMITMENTS

     The amount of capital expenditure authorized by the Group for which no
provision has been made in the consolidated financial statements is as follows:

<Table>
<Caption>
                                                                2002        2001
                                                              L MILLION   L MILLION
                                                              ---------   ---------
<S>                                                           <C>         <C>
Contracted..................................................     13          28
</Table>

     In addition the Group has contracted to buy L28 million of programming
rights for which the license period has not yet started.

  CAPITAL AND OPERATING LEASES

     The Group leases a number of assets under arrangements accounted for as
capital leases, as follows:

<Table>
<Caption>
                                                                                       NET
                                                       ACQUISITION   ACCUMULATED      BOOK
                                                          COSTS      DEPRECIATION     VALUE
                                                        L MILLION     L MILLION     L MILLION
                                                       -----------   ------------   ---------
<S>                                                    <C>           <C>            <C>
At December 31, 2002:
  Electronic equipment...............................      283           (185)          98
  Other equipment....................................      118            (58)          60
At December 31, 2001:
  Electronic equipment...............................      290           (187)         103
  Other equipment....................................      109            (43)          66
                                                           ---           ----          ---
</Table>

     Depreciation charged on these assets was L44 million and L45 million for
the years ended December 31, 2002 and 2001 respectively.

     The Group leases business offices and uses certain equipment under lease
arrangements accounted for as operating leases. Minimum rental expense under
such arrangements amounted to L21 million, L19 million and L17 million for the
years ended December 31, 2002, 2001 and 2000, respectively and is included in
depreciation expense detailed in note 11.

     Future minimum lease payments under capital and operating leases are
summarized as follows as of December 31, 2002:

<Table>
<Caption>
                                                               CAPITAL    OPERATING
                                                               LEASES      LEASES
                                                              L MILLION   L MILLION
                                                              ---------   ---------
<S>                                                           <C>         <C>
2003........................................................      89         25
2004........................................................      46         18
2005........................................................      38         14
2006........................................................      29         13
2007........................................................      19         12
2008 and thereafter.........................................      13         91
                                                                 ---         --
                                                                 234
Imputed interest............................................     (30)
                                                                 ---
                                                                 204
                                                                 ===
</Table>

     It is expected that, in the normal course of business, expiring leases will
be renewed or replaced.

                                      IV-37
<PAGE>
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The Group leases capacity on its network to other telecommunications
companies. These leases are accounted for as operating leases and revenues
received are recognized over the life of the leases as follows:

<Table>
<Caption>
                                                               L MILLION
                                                               ---------
<S>                                                            <C>
2003........................................................       5
2004........................................................       5
2005........................................................       3
2006........................................................       1
2007........................................................       1
2008 and thereafter.........................................       5
                                                                   --
</Table>

     The assets held under these leases are accounted for as follows:

<Table>
<Caption>
                                                     ACQUISITION   ACCUMULATED     NET BOOK
                                                        COSTS      DEPRECIATION     VALUE
                                                      L MILLION     L MILLION     L MILLION
                                                     -----------   ------------   ----------
<S>                                                  <C>           <C>            <C>
At December 31, 2002
  Cable and ducting................................      45             (5)           40
At December 31, 2001
  Cable and ducting................................      45             (3)           42
                                                         --             --            --
</Table>

     Depreciation charged on these assets was L2 million and L2 million for the
years ended December 31, 2002 and 2001 respectively.

  CONTINGENT LIABILITIES

     The Group has provided performance bonds in respect of its national licence
and to local authorities up to a maximum amount of L6 million (2001: L7
million).

     The Group is a party to various other legal proceedings in the ordinary
course of business which it does not believe will result, in aggregate, in a
material adverse effect on its financial condition or results of operations.

22  RELATED-PARTY TRANSACTIONS

  IDENTITY OF RELEVANT RELATED PARTIES

     Liberty Media, Inc ("Liberty") and Microsoft are related parties of the
Group, in that they control or controlled, directly or indirectly, more than 20%
of the voting rights of the Company in 2002, 2001 and 2000.

     Flextech up to its acquisition on April 19, 2000 was a related party of the
Group as Liberty owned more than 20% of the voting rights of Flextech.

     UKTV is a related party of the Group, as the Group owns 50% of the voting
rights.

     TV Travel Group Limited ("TVT") was a related party of the Group, as the
Group owned 37.95% of the voting rights before disposal in 2002.

     In 2001 Screenshop Limited ("Screenshop") became a related party when the
Group sold its shareholding in Screenshop to Sit-Up Limited in return for a
39.02% shareholding in Sit-Up Limited.

  NATURE OF TRANSACTIONS

     The Group had a L10 million loan facility with Liberty. Interest charged on
this loan was Lnil in 2001 and L1 million in 2000. The balance due to Liberty at
December 31, 2000 was L17 million including accrued interest and was repaid in
2001.

                                      IV-38
<PAGE>
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The Group purchases software and consultancy services from Microsoft, on
normal commercial terms. Purchases in the year ended December 31, 2002 amounted
to L1 million (2001: L2 million, 2000: L2 million). The balance outstanding in
respect of these purchases was Lnil at December 31, 2002, 2001 and 2000.

     The Group has billed overheads and costs incurred on their behalf to UKTV,
TVT and Screenshop of L11 million, L1 million and L1 million (2001: L8 million,
L3 million and L1 million, 2000: L7 million, L10 million and Lnil) respectively.
The Group has also made a loan to UKTV. Interest charged on this loan was L12
million (2001: L12 million, 2000: L15 million). Amounts due from UKTV, TVT and
Screenshop at December 31, 2002 were L208 million, L1 million and L4 million
respectively (2001: L218 million, L28 million and Lnil and 2000: L229 million,
L31 million and Lnil respectively).

     In the normal course of its business the Group purchases programming from
UKTV on normal commercial terms. Purchases in the year ended December 31, 2002
were L13 million (2001: L9 million, 2000: L7 million). The balance due to UKTV
at December 31, 2002 was Lnil (2001: L2 million, 2000: Lnil).

23  SUBSEQUENT EVENTS AND FINANCIAL RESTRUCTURING

     The Group is renegotiating its bank facilities and debt financing
arrangements. Further details of the proposed Financial Restructuring are as
follows:

     On September 30, 2002, we announced that we had reached a preliminary
agreement relating to a financial restructuring (the "Financial Restructuring")
with an ad hoc committee of our bondholders ("the Bondholder Committee"). That
agreement provides for the cancellation of all outstanding notes and debentures
(the "Notes"), representing approximately L3.4 billion of indebtedness, issued
by the Company and Telewest Finance (Jersey) Limited and certain other unsecured
foreign exchange hedge contracts (the "Hedge Contracts") of the Company in
exchange for New Ordinary Shares ("New Shares") representing 97% of the issued
share capital of the Company immediately after the Financial Restructuring. The
Company's current ordinary shareholders will receive the remaining 3% of the
Company's issued ordinary share capital.

     We also announced on September 30, 2002 that we were deferring payment of
interest under certain of our Notes and the settlement of the Hedge Contracts.
Such non-payment continues and has resulted in defaults under the Group's bank
facilities and its bonds. Based on one such default, in respect of non-payment
of approximately L10.5 million to a Hedge Contract counter-party, that
counter-party has filed a petition for the winding-up of the Company with a UK
court. The Company intends to deal with this claim as part of the overall
restructuring of its unsecured debt obligations and does not believe that the
legal action will delay or significantly impede the Financial Restructuring
process. The Company will of course continue to meet its obligations to its
suppliers and trade creditors and this legal action is expected to have no
impact on customer service.

     On January 15, 2003, we announced that we had reached a non-binding
agreement with respect to the terms of amended and restated credit facilities
with both the steering committee of our senior lenders and the Bondholder
Committee. In addition, the terms of these facilities have received credit
committee approval, subject to documentation and certain other issues, from all
of our senior lenders, save for those banks which are also creditors by virtue
of the unsecured Hedge Contracts with which we will deal in the overall
Financial Restructuring.

     The terms of the amended and restated bank facilities are as follows:

     - the amended facilities total L2,155 million, comprising term loans of
       L1,840 million, L190 million of committed overdraft and revolving credit
       facilities and an uncommitted term facility of L125 million;

     - the amended facilities do not amortise; and the majority of the
       facilities will mature on December 31, 2005 with the balance maturing on
       June 30, 2006;

     - financial covenants will be re-set to reflect the Company's new business
       plan; and
                                      IV-39
<PAGE>
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     - the pricing on the facilities will be increased to reflect market
       sentiment.

     These amended facilities will replace the Group's existing bank facilities,
(the "Senior Secured Facility") and are, as noted above, conditional on various
matters, including the satisfactory finalisation of arrangements for dealing
with foreign exchange creditors and the completion of our balance sheet
restructuring. These amended credit facilities will provide the Company with
substantial liquidity, which is expected to be sufficient to see the Company
through to cash flow positive after completion of the Financial Restructuring.

     Negotiations are continuing with the Bondholder Committee, the Company's
senior lenders and certain other major stakeholders with a view to the timely
completion of the Financial Restructuring.

     These financial statements have been prepared on a going concern basis and
do not include any adjustments that would arise as a result of the going concern
basis of preparation being inappropriate. The board of directors have confidence
in the successful conclusion of a restructuring of the Company's balance sheet
(and any required amendments to the Senior Secured Facility) and, together with
and on the basis of cash flow information that they have prepared, the directors
consider that the Group will continue to operate as a going concern for a period
of at least 12 months from the date of issue of these financial statements. Any
restructuring will require the approval of our bankers and various stakeholders.
Inherently, there can be no certainty in relation to any of these matters.

24  QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

<Table>
<Caption>
                                                                 2002
                                       ---------------------------------------------------------
                                                    FOURTH
                                         TOTAL     QUARTER*      THIRD      SECOND       FIRST
                                       RESTATED    RESTATED     QUARTER     QUARTER     QUARTER
                                       L MILLION   L MILLION   L MILLION   L MILLION   L MILLION
                                       ---------   ---------   ---------   ---------   ---------
<S>                                    <C>         <C>         <C>         <C>         <C>
Revenue..............................    1,283         307        323         334         319
Gross profit (after L841 million
  fixed asset impairment charge in
  the fourth quarter)................     (469)       (764)        97         100          98
Operating loss.......................   (2,440)     (2,349)       (31)        (29)        (31)
Finance expenses, net................     (296)        (65)       (70)        (61)       (100)
Net loss.............................   (2,789)     (2,471)      (134)        (59)       (125)
Basic and diluted loss per ordinary
  share..............................     (97p)       (86p)       (5p)        (2p)        (4p)
                                        ------      ------       ----         ---        ----
</Table>

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

* In the fourth quarter the Group recorded a goodwill impairment charge of
  L1,445 million, wrote down the value of its investments in affiliates by L130
  million and recorded a fixed asset impairment charge of L841 million.

<Table>
<Caption>
                                                                 2001
                                       ---------------------------------------------------------
                                                    FOURTH       THIRD      SECOND       FIRST
                                         TOTAL     QUARTER*     QUARTER     QUARTER     QUARTER
                                       L MILLION   L MILLION   L MILLION   L MILLION   L MILLION
                                       ---------   ---------   ---------   ---------   ---------
<S>                                    <C>         <C>         <C>         <C>         <C>
Revenue..............................    1,254         329        312         315         298
Gross profit.........................      325          91         85          83          66
Operating loss.......................   (1,121)       (844)       (83)        (87)       (107)
Finance expenses, net................     (472)       (131)      (104)        (95)       (142)
Net loss.............................   (1,741)     (1,122)      (192)       (185)       (242)
Basic and diluted loss per ordinary
  share..............................     (60p)       (38p)       (7p)        (6p)        (9p)
                                        ------      ------       ----        ----        ----
</Table>

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

* In the fourth quarter the Group recorded a goodwill impairment charge of L766
  million and wrote down the value of its investments in affiliates by L202
  million.

     Finance expenses include foreign exchange gains and losses on the
retranslation or valuation of US Dollar-denominated financial instruments using
period end exchange rates and market valuations.

                                      IV-40
<PAGE>
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

25  SEGMENTAL INFORMATION

     The Group applies SFAS 131, Disclosures about Segments of an Enterprise and
Related Information. SFAS 131 establishes standards for reporting information
about operating segments in annual financial statements. It also establishes
standards for related disclosures about products and services, and geographic
areas. Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker, or decision-making group, in deciding how to
allocate resources and in assessing performance. The Group's chief operating
decision-making group is the board of directors. The operating segments are
managed separately because each operating segment represents a strategic
business unit that offers different products and services in different markets.
The Group operates in two main segments: Cable and Content. The Cable segment of
our business can be subdivided, for revenue purposes only, between four product
ranges: Cable Television, Consumer Telephony, Internet and other, and Business
Services. The Internet and other unit comprises internet sales and sales of
cable publications. The Content segment provides entertainment content,
interactive and transactional services to the UK pay-TV broadcasting market.

     The accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies. In 2001, the Group
changed the structure of its segmental analysis, and certain corresponding
information from the previous years has been restated to reflect the change in
structure.

                                      IV-41
<PAGE>
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The following tables present summarized financial information relating to
the reportable segments for each of the three years ended December 31, 2002:

<Table>
<Caption>
                                                  NOTE 2
                                                   2002        2002
                                                 RESTATED    RESTATED      2001        2000
                                                 $ MILLION   L MILLION   L MILLION   L MILLION
                                                 ---------   ---------   ---------   ---------
<S>                                              <C>         <C>         <C>         <C>
CABLE
Cable television...............................      541         336         329         279
Consumer telephony.............................      797         495         488         445
Internet and other.............................      101          63          40          16
                                                  ------      ------      ------       -----
TOTAL CONSUMER DIVISION........................    1,439         894         857         740
Business Services Division.....................      455         283         268         248
                                                  ------      ------      ------       -----
THIRD PARTY REVENUE............................    1,894       1,177       1,125         988
Operating costs and expenses...................   (1,333)       (828)       (822)       (757)
Depreciation(3)................................   (2,134)     (1,326)       (453)       (392)
Amortization of goodwill(2)....................   (1,635)     (1,016)        (82)        (86)
                                                  ------      ------      ------       -----
OPERATING LOSS.................................   (3,208)     (1,993)       (232)       (247)
                                                  ======      ======      ======       =====
Share of net loss of affiliates................       --          --          (5)         (6)
Additions to property and equipment............      737         458         649         587
Investment in affiliates.......................        5           3           2           3
Goodwill.......................................      492         306       1,322       1,394
Total assets...................................    5,833       3,624       5,093       5,146
                                                  ------      ------      ------       -----
CONTENT
Content division...............................      195         121         143          88
Inter-segmental(1).............................      (24)        (15)        (14)         (7)
                                                  ------      ------      ------       -----
THIRD PARTY REVENUE............................      171         106         129          81
Operating costs and expenses...................     (183)       (114)       (135)       (101)
Depreciation(3)................................      (16)        (10)        (16)        (31)
Amortization of goodwill(2)....................     (691)       (429)       (867)        (61)
                                                  ------      ------      ------       -----
OPERATING LOSS.................................     (719)       (447)       (889)       (112)
                                                  ======      ======      ======       =====
Share of net loss of affiliates and
  impairment...................................     (190)       (118)       (211)         (9)
Additions to property and equipment............        5           3           4           8
Investment in affiliates.......................      600         373         545         781
Goodwill.......................................      227         141         570       1,409
Total assets...................................      758         471       1,239       2,178
                                                  ------      ------      ------       -----
TOTAL
Cable television...............................      541         336         329         279
Consumer telephony.............................      797         495         488         445
Internet and other.............................      101          63          40          16
                                                  ------      ------      ------       -----
TOTAL CONSUMER DIVISION........................    1,439         894         857         740
Business Services Division.....................      455         283         268         248
                                                  ------      ------      ------       -----
</Table>

                                      IV-42
<PAGE>
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<Table>
<Caption>
                                                  NOTE 2
                                                   2002        2002
                                                 RESTATED    RESTATED      2001        2000
                                                 $ MILLION   L MILLION   L MILLION   L MILLION
                                                 ---------   ---------   ---------   ---------
<S>                                              <C>         <C>         <C>         <C>
TOTAL CABLE DIVISION...........................    1,894       1,177       1,125         988
Content division...............................      195         121         143          88
Inter-segmental(1).............................      (24)        (15)        (14)         (7)
                                                  ------      ------      ------       -----
TOTAL REVENUE..................................    2,065       1,283       1,254       1,069
Operating costs and expenses...................   (1,516)       (942)       (957)       (858)
Depreciation(3)................................   (2,150)     (1,336)       (469)       (423)
Amortization of goodwill(2)....................   (2,326)     (1,445)       (949)       (147)
                                                  ------      ------      ------       -----
OPERATING LOSS.................................   (3,927)     (2,440)     (1,121)       (359)
Other expense(2)...............................     (607)       (377)       (690)       (402)
Income tax benefit.............................       45          28          70           6
                                                  ------      ------      ------       -----
NET LOSS.......................................   (4,489)     (2,789)     (1,741)       (755)
                                                  ======      ======      ======       =====
Share of net loss of affiliates and
  impairment...................................     (190)       (118)       (216)        (15)
Additions to property and equipment............      742         461         653         595
Investment in affiliates.......................      605         376         547         784
Goodwill.......................................      719         447       1,892       2,803
Total assets...................................    6,591       4,095       6,332       7,324
                                                  ------      ------      ------       -----
</Table>

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

(1) Inter-segmental revenues are revenues from sales in our Content Division
    which are costs in our Cable Division and are eliminated on consolidation.

(2) In the fourth quarter of 2002, the Group recorded a goodwill impairment
    charge of L1,445 million and wrote down the value of its investments in
    affiliates by L130 million. In the fourth quarter of 2001, the Group
    recorded a goodwill impairment charge of L766 million and wrote down the
    value of its investments in affiliates by L202 million.

(3) In the fourth quarter of 2002 the Group recorded a fixed asset impairment
    charge of L841 million.

                                      IV-43
<PAGE>

                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) 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

                                          By      /s/ CHARLES Y. TANABE
                                            ------------------------------------
                                                     Charles Y. Tanabe
                                             Senior Vice President and General
                                                           Counsel

Dated: March 15, 2004

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.

<Table>
<Caption>
                    SIGNATURE                                      TITLE                       DATE
                    ---------                                      -----                       ----
<S>     <C>                                          <C>                                  <C>

                /s/ JOHN C. MALONE                       Chairman of the Board, and       March 15, 2004
 ------------------------------------------------                 Director
                  John C. Malone


              /s/ ROBERT R. BENNETT                    Director, President and Chief      March 15, 2004
 ------------------------------------------------            Executive Officer
                Robert R. Bennett


               /s/ DONNE F. FISHER                                Director                March 15, 2004
 ------------------------------------------------
                 Donne F. Fisher


                /s/ PAUL A. GOULD                                 Director                March 15, 2004
 ------------------------------------------------
                  Paul A. Gould


                /s/ GARY S. HOWARD                                Director                March 15, 2004
 ------------------------------------------------
                  Gary S. Howard


               /s/ DAVID E. RAPLEY                                Director                March 15, 2004
 ------------------------------------------------
                 David E. Rapley


               /s/ M. LAVOY ROBISON                               Director                March 15, 2004
 ------------------------------------------------
                 M. LaVoy Robison


               /s/ LARRY E. ROMRELL                               Director                March 15, 2004
 ------------------------------------------------
                 Larry E. Romrell


              /s/ DAVID J.A. FLOWERS                     Senior Vice President and        March 15, 2004
 ------------------------------------------------      Treasurer (Principal Financial
                David J.A. Flowers                                Officer)


             /s/ CHRISTOPHER W. SHEAN                    Senior Vice President and        March 15, 2004
 ------------------------------------------------     Controller (Principal Accounting
               Christopher W. Shean                               Officer)
</Table>

                                      IV-44
<PAGE>

                                 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):

<Table>
<S>      <C>
 3 -- Articles of Incorporation and Bylaws:
   3.1   Restated Certificate of Incorporation of Liberty, dated
         August 9, 2001 (incorporated by reference to Exhibit 3.2 to
         the Registration Statement on Form S-1 of Liberty Media
         Corporation (File No. 333-55998) as filed on February 21,
         2001 (the "Split Off S-1 Registration Statement")).
   3.2   Bylaws of Liberty, as adopted August 9, 2001 (incorporated
         by reference to Exhibit 3.4 of the Split Off S-1
         Registration Statement).

4 -- Instruments Defining the Rights of Securities Holders, including
     Indentures:
   4.1   Specimen certificate for shares of Series A common stock,
         par value $.01 per share, of the Registrant (incorporated by
         reference to Exhibit 4.1 to the Split Off S-1 Registration
         Statement).
   4.2   Specimen certificate for shares of Series B common stock,
         par value $.01 per share, of the Registrant (incorporated by
         reference to Exhibit 4.2 to the Split Off S-l Registration
         Statement).
   4.3   Liberty undertakes to furnish the Securities and Exchange
         Commission, upon request, a copy of all instruments with
         respect to long-term debt not filed herewith.

10 -- Material Contracts:
  10.1   Inter-Group Agreement dated as of March 9, 1999, between
         AT&T Corp. and Liberty Media Corporation, Liberty Media
         Group LLC and each Covered Entity listed on the signature
         pages thereof (incorporated by reference to Exhibit 10.2 to
         the Registration Statement on Form S-4 of Liberty Media
         Corporation (File No. 333-86491) as filed on September 3,
         1999, the "Liberty S-4 Registration Statement").
  10.2   Ninth Supplement to Inter-Group Agreement dated as of June
         14, 2001, between and among AT&T Corp., on the one hand, and
         Liberty Media Corporation, Liberty Media Group LLC, AGI LLC,
         Liberty SP, Inc., LMC Interactive, Inc. and Liberty AGI,
         Inc., on the other hand (incorporated by reference to
         Exhibit 10.25 to the Registration Statement on Form S-1 of
         Liberty Media Corporation (File No. 333-66034) as filed on
         July 27, 2001).
  10.3   Intercompany Agreement dated as of March 9, 1999, between
         Liberty and AT&T Corp. (incorporated by reference to Exhibit
         10.3 to the Liberty S-4 Registration Statement).
  10.4   Tax Sharing Agreement dated as of March 9, 1999, by and
         among AT&T Corp., Liberty Media Corporation,
         Tele-Communications, Inc., Liberty Ventures Group LLC,
         Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings,
         Inc. and each Covered Entity listed on the signature pages
         thereof (incorporated by reference to Exhibit 10.4 to the
         Liberty S-4 Registration Statement).
  10.5   First Amendment to Tax Sharing Agreement dated as of May 28,
         1999, by and among AT&T Corp., Liberty Media Corporation,
         Tele-Communications, Inc., Liberty Ventures Group LLC,
         Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings,
         Inc. and each Covered Entity listed on the signature pages
         thereof (incorporated by reference to Exhibit 10.5 to the
         Liberty S-4 Registration Statement).
  10.6   Second Amendment to Tax Sharing Agreement dated as of
         September 24, 1999, by and among AT&T Corp., Liberty Media
         Corporation, Tele-Communications, Inc., Liberty Ventures
         Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT
         Holdings, Inc. and each Covered Entity listed on the
         signature pages thereof (incorporated by reference to
         Exhibit 10.6 to the Registration Statement on Form S-1 of
         Liberty Media Corporation (File No. 333-93917) as filed on
         December 30, 1999 (the "Liberty S-1 Registration
         Statement)).
  10.7   Third Amendment to Tax Sharing Agreement dated as of October
         20, 1999, by and among AT&T Corp., Liberty Media
         Corporation, Tele-Communications, Inc., Liberty Ventures
         Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT
         Holdings, Inc. and each Covered Entity listed on the
         signature pages thereof (incorporated by reference to
         Exhibit 10.7 to the Liberty S-l Registration Statement).
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  10.8   Fourth Amendment to Tax Sharing Agreement dated as of
         October 28, 1999, by and among AT&T Corp., Liberty Media
         Corporation, Tele-Communications, Inc., Liberty Ventures
         Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT
         Holdings, Inc. and each Covered Entity listed on the
         signature pages thereof (incorporated by reference to
         Exhibit 10.8 to the Liberty S-l Registration Statement).
  10.9   Fifth Amendment to Tax Sharing Agreement dated as of
         December 6, 1999, by and among AT&T Corp., Liberty Media
         Corporation, Tele-Communications, Inc., Liberty Ventures
         Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT
         Holdings, Inc. and each Covered Entity listed on the
         signature pages thereof (incorporated by reference to
         Exhibit 10.9 to the Liberty S-l Registration Statement).
  10.10  Sixth Amendment to Tax Sharing Agreement dated as of
         December 10, 1999, by and among AT&T Corp., Liberty Media
         Corporation, Tele-Communications, Inc., Liberty Ventures
         Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT
         Holdings, Inc. and each Covered Entity listed on the
         signature pages thereof (incorporated by reference to
         Exhibit 10.10 to the Liberty S-l Registration Statement).
  10.11  Seventh Amendment to Tax Sharing Agreement dated as of
         December 30, 1999, by and among AT&T Corp., Liberty Media
         Corporation, Tele-Communications, Inc., Liberty Ventures
         Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT
         Holdings, Inc. and each Covered Entity listed on the
         signature pages thereof (incorporated by reference to
         Exhibit 10.11 to the Liberty S-l Registration Statement).
  10.12  Eighth Amendment to Tax Sharing Agreement dated as of July
         25, 2000, by and among AT&T Corp., Liberty Media
         Corporation, AT&T Broadband LLC, Liberty Ventures Group LLC,
         Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings,
         Inc. and each Covered Entity listed on the signature pages
         thereof (incorporated by reference to Exhibit 10.12 to the
         Split Off Registration Statement).
  10.13  Instrument dated January 14, 2000, adding The Associated
         Group, Inc. as a party to the Tax Sharing Agreement dated as
         of March 9, 1999, as amended, among The Associated Group,
         Inc., AT&T Corp., Liberty Media Corporation,
         Tele-Communications, Inc., Liberty Ventures Group LLC,
         Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings,
         Inc. and each Covered Entity listed on the signature pages
         thereof (incorporated by reference to Exhibit 10.12 to the
         Liberty S-1 Registration Statement).
  10.14  Restated and Amended Employment Agreement dated November 1,
         1992, between Tele-Communications, Inc. and John C. Malone
         (assumed by Liberty as of March 9, 1999), and the amendment
         thereto dated June 30, 1999 and effective as of March 9,
         1999, between Liberty and John C. Malone (incorporated by
         reference to Exhibit 10.6 to the Liberty S-4 Registration
         Statement).
  10.15  Second Amendment to Employment Agreement dated November 1,
         1992 between TCI and John C. Malone (assumed by Liberty as
         of March 9, 1999), as amended effective March 9, 1999, filed
         herewith.
  10.16  Amended and Restated Agreement and Plan of Restructuring and
         Merger among UnitedGlobalCom, Inc., New UnitedGlobalCom,
         Inc., United/New United Merger Sub, Inc., Liberty Media
         Corporation, Liberty Media International, Inc. and Liberty
         Global, Inc., dated December 31, 2001 (incorporated by
         reference to Current Form 8-K filed by Liberty Media
         Corporation on January 9, 2002, Commission File No.
         0-20421).
  10.17  Liberty Media Corporation 2000 Incentive Plan (As Amended
         and Restated Effective September 11, 2002) (incorporated by
         reference to Exhibit 10.16 to Liberty's Annual Report on
         Form 10-K/A for the year ended December 31, 2002, Commission
         File No. 0-20421).
  10.18  Liberty Media Corporation 2002 Non-employee Director
         Incentive Plan (incorporated by reference to Exhibit 10.17
         to Liberty's Annual Report on Form 10-K/A for the year ended
         December 31, 2002, Commission File No. 0-20421).
  10.19  Letter Agreement, dated as of May 8, 2003, between Robert R.
         Bennett and Liberty regarding Mr. Bennett's personal use of
         Liberty's aircraft, filed herewith.
  10.20  Amended and Restated Stock Purchase Agreement, dated as of
         June 30, 2003, by and among Liberty, Comcast, Comcast QVC,
         Inc. and QVC, Inc. (incorporated by reference to Exhibit
         99.1 to the Company's Current Report on Form 8-K filed on
         September 18, 2003, Commission File No. 0-20421).
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21       Subsidiaries of Liberty Media Corporation, filed herewith.
23.1     Consent of KPMG LLP, filed herewith.
23.2     Consent of KPMG Audit plc, filed herewith.
31.1     Rule 13a-14(a)/15d - 14(a) Certification, filed herewith.
31.2     Rule 13a-14(a)/15d - 14(a) Certification, filed herewith.
31.3     Rule 13a-14(a)/15d - 14(a) Certification, filed herewith.
32       Section 1350 Certification, filed herewith.
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