27MAR200700380279 8MAR200713542307 18APR200814474779 28FEB200721411632 2007 Annual Report CONTENTS Letter to Shareholders Stock Performance Company Profile Financial Information Corporate Data 1 8 11 F-1 Inside Back Cover Certain statements in this Annual Report constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding our business, product and marketing strategies, new service offerings, our tax sharing arrangement with AT&T Corp. and estimated amounts payable under that arrangement, revenue growth, business prospects, and subscriber trends at QVC, Inc., Starz Entertainment, LLC and The DirecTV Group Inc., anticipated programming and marketing costs at Starz Entertainment, our expectations regarding Starz Media’s results of operations for the next two to three years, our projected sources and uses of cash, the estimated value of our derivative instruments, and the anticipated non-material impact of certain contingent liabilities related to legal and tax proceedings and other matters arising in the ordinary course of business. In particular, statements in our ‘‘Letter to Shareholders’’ and under ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations’’ and ‘‘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: (cid:127) customer demand for our products and services and our ability to adapt to changes in demand; (cid:127) competitor responses to our products and services, and the products and services of the entities in which we have interests; (cid:127) uncertainties inherent in the development and integration of new business lines and business strategies; (cid:127) uncertainties associated with product and service development and market acceptance, including the development and provision of programming for new television and telecommunications technologies; (cid:127) our future financial performance, including availability, terms and deployment of capital; (cid:127) our ability to successfully integrate and recognize anticipated efficiencies and benefits from the businesses we acquire; (cid:127) the ability of suppliers and vendors to deliver products, equipment, software and services; (cid:127) the outcome of any pending or threatened litigation; (cid:127) availability of qualified personnel; (cid:127) 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; (cid:127) changes in the nature of key strategic relationships with partners and joint venturers; (cid:127) general economic and business conditions and industry trends; (cid:127) consumer spending levels, including the availability and amount of individual consumer debt; (cid:127) disruption in the production of theatrical films or television programs due to strikes by unions representing writers, directors or actors; (cid:127) continued consolidation of the broadband distribution and movie studio industries; (cid:127) changes in distribution and viewing of television programming, including the expanded deployment of personal video recorders, video on demand and IP television and their impact on home shopping networks; increased digital TV penetration and the impact on channel positioning of our networks; (cid:127) rapid technological changes; (cid:127) capital spending for the acquisition and/or development of telecommunications networks and services; (cid:127) the regulatory and competitive environment of the industries in which we, and the entities in which we have interests, operate; (cid:127) threatened terrorist attacks and ongoing military action in the Middle East and other parts of the world; and (cid:127) fluctuations in foreign currency exchange rates and political unrest in international markets. These forward-looking statements and such risks, uncertainties and other factors speak only as of the date made, 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. When considering such forward-looking statements, you should keep in mind any risk factors identified and other cautionary statements contained in this Annual Report. Such risk factors and statements describe circumstances that could cause actual results to differ materially from those contained in any forward-looking statement. This Annual Report includes information concerning public companies in which we have minority interests 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. Dear Fellow Shareholders: Four years ago Liberty Media initiated a series of structural initiatives to reduce complexity, enhance transparency, broaden investor choice, and increase shareholder value. These initiatives resulted in the spin-off of two companies and the creation of three tracking stocks, each with a specific focus. Throughout this period the pace of change has been rapid and the results largely positive. We remain encouraged by our prospects and confident Liberty is on the right path to maximize long-term shareholder returns. The watershed transaction of the past year was the completion of the exchange of our News Corp shares for a News Corp subsidiary that holds a 41% interest in DIRECTV, regional sports networks in Seattle, Denver and Pittsburgh and $465 million in cash. This was an important transaction on a number of fronts and allowed us to exchange a passive $10 billion investment tax-efficiently for the largest position in the world’s largest satellite television provider. In December 2006, when we agreed to the News Corp exchange, we were excited by the prospect of owning a large stake in DIRECTV. Given the ability of consumers to create their own ‘‘triple-play’’ bundle, slowing broadband growth, the shift to high-definition TV, and the value that consumers placed on video (compared to voice and data), we believed DIRECTV was undervalued by the market. Our confidence in DIRECTV as the preeminent video platform because of the depth and breadth of its HD offering, particularly in sports content, was rewarded in 2007 as DIRECTV produced superior results in a challenging marketplace. Today we are pleased with this transaction from a structural, strategic and financial perspective. On April 2, 2008, we purchased an additional 78.3 million shares of DIRECTV, increasing our ownership to 48%. DIRECTV is the central asset in Liberty Entertainment and will drive our strategy for this group of programming and distribution assets. Our 2007 results in the stock market were mixed. Liberty Capital’s share value increased 18.9% in 2007 while Liberty Interactive’s share value declined 11.5%. In comparison, the S&P 500, including dividends, advanced 5.5% in 2007, while the S&P Media Index was down 16.7%. While some might argue it was a particularly tough year for media and retailing stocks, we seek to outperform the market and our peer group. We strive for superior results in 2008. It is worthwhile to mention the current upheaval in the capital markets. The recent tightening of credit has reduced access to capital and caused concern about counterparty exposure. Liberty conservatively manages its balance sheet, liquidity and credit exposure in anticipation of the types of events the market is experiencing today. We continue to have access to low-cost capital through our public equity portfolio, equity derivatives, subsidiaries and cash balances. We manage our cash in a conservative manner and take positions in high-quality investments, with very limited exposure to auction rate securities. We carefully monitor the creditworthiness of our 1 financial counterparties. While capital is more expensive for all, the credit markets remain open for strategic transactions, and we may now be in a stronger position to invest compared to private equity firms. Liberty Interactive In 2007 Liberty Interactive remained true to its strategy. We made significant share repurchases as well as a number of accretive, strategic acquisitions, and generated organic operating growth. Liberty Interactive Group’s revenue increased 6% for the year. Operating cash flow (OCF1) was essentially flat. QVC, Inc. QVC is the global leader in televised home shopping and the centerpiece of Liberty Interactive. For over twenty years, QVC has focused on the customer, maintained price discipline, emphasized long-term health to promote growth and generated impressive free cash flow margins. QVC has a differentiated customer value proposition: unique and high-quality products at good value, presented in an engaging format, supported by first-class customer service. Typically, the first price QVC offers is its lowest price. With its customer-first approach and price integrity, QVC has built trust and loyalty—95% of its business comes from repeat buyers. In 2007, QVC increased revenue 5% to $7.4 billion and operating cash flow was level at just under $1.7 billion. QVC.com online revenue continued to grow accounting for 22% of US revenue and 20% of total revenue in 2007. QVC performance slowed in 2007 due primarily to difficult retail market conditions, merchandising that did not sufficiently excite customers, and continuing operational challenges at QVC Japan and QVC Germany. QVC has an impressive track record of revenue and profitability growth over its 21-year history. While 2007 was below trend, QVC believes this was largely attributable to one-time events and challenges in the marketplace and not indicative of ongoing structural challenges to its ability to grow. Despite the difficult current retail environment, business fundamentals remain strong, and the company expects to continue on a long-term growth trajectory. Other Liberty Interactive Businesses Liberty Interactive’s e-commerce businesses experienced impressive top-line growth and operating cash flow expansion and are poised for ongoing success. Provide Commerce continued to execute successfully on its strategy of shipping perishable products, including flowers under the ProFlowers brand, directly from the supplier to the consumer. BUYSEASONS, the largest web-only provider of a wide range of costume and party accessories experienced solid revenue growth in 2007. Backcountry.com, a retailer of athletic and outdoor products acquired last year, produced the fastest growth in Liberty Interactive. In aggregate, our e-commerce companies achieved 26% revenue growth and 21% operating cash flow growth in 2007. 2 In addition to organic growth, we are pursuing initiatives to drive efficiencies among the Liberty Interactive businesses in an effort to achieve even higher margins. We believe these initiatives should help Liberty Interactive achieve its long-term targets. We are also seeking add-on acquisitions for each business. Other Liberty Interactive Assets In January 2008, we purchased an additional 14 million shares of InterActiveCorp from a single holder at a price of $24.25 per share. As a result of this purchase and a concurrent IAC redemption, the shares owned by Liberty now represent 30% of the equity of IAC. Acquisition and Divestitures Since we last wrote to you, we made two important and attractive acquisitions of e-commerce companies and completed our first strategic investment in a vendor of QVC. In June, we acquired 81% of Backcountry.com, a rapidly growing e-commerce marketplace, offering outdoor adventure and action sports gear and clothing through its six separate web sites. This business has an impressive track record of growth and continued to perform very well through 2007. In August, we made a strategic investment in BORBA, a provider of nutraceutical and cosmeceutical products. In its first year, BORBA sold $5 million in product through QVC. This investment is part of a larger strategy of identifying and investing in emerging, independent brands and allowing Liberty to participate in the value creation stemming from these vendors’ distribution through QVC. On December 31, we acquired 83% of Bodybuilding.com, an internet retailer of sports, fitness and nutritional supplements coupled with an informational SuperSite that has made it the most visited bodybuilding and fitness site in the world. The company had over 100,000 daily and 3.1 million monthly unique visitors in the month leading up to our acquisition.2 We are pleased with these acquisitions and continue to seek businesses that offer unique value propositions, strong management teams and attractive financial metrics, and complement our portfolio of businesses. Capital Structure and Liquidity At year end Liberty Interactive had attributed cash and liquid investments of $4.8 billion and attributed debt of $7.2 billion. Liberty Interactive’s year ending attributed net debt of just over $6.6 billion equated to a multiple of 3.9 times annual cash flow. As previously stated, we would be comfortable sustaining net debt levels of 4x to 5x OCF, but market conditions may not allow us to borrow to the upper end of that range on attractive terms. Share Repurchases During 2007, we repurchased 56.3 million Liberty Interactive shares for $1.2 billion. Since the creation of the Liberty Interactive tracking stock, we 3 have repurchased 110.5 million shares for total cash consideration of $2.2 billion or 15.7% of the shares outstanding. Liberty Capital We made further progress in converting Liberty Capital’s non-core equity holdings tax-efficiently into strategic operating assets and cash. Our success in this regard, particularly the completion of the News Corp exchange, led to the decision to recapitalize our Liberty Capital tracking stock and issue the new Liberty Entertainment tracking stock. The Liberty Entertainment group of assets focuses on television and internet distribution and programming, and includes our DIRECTV stake, Starz Entertainment, three regional sports networks, GSN, FUN Technologies, and our WildBlue equity position. Prior to the formation of Liberty Entertainment, all assets and liabilities not attributed to Liberty Interactive were attributed to the Liberty Capital Group. The ‘‘old’’ Liberty Capital Group’s 2007 results are summarized as follows. Operating Performance Liberty Capital’s revenue increased 26% to just over $1.6 billion for the year, while operating cash flow declined 56% to $45 million. The group’s largest operating asset, Starz Entertainment, experienced strong cash flow expansion while investment in content at Starz Media reduced OCF. Starz Entertainment Starz subscribers increased 8% to 16.3 million, while Encore subscribers grew 9% for the year to end at 30.7 million. Subscriber growth, along with slightly higher effective rates, resulted in 3% revenue growth. The growth rate was reduced by the fixed rate agreements Starz has entered into in recent years and the shift of some subscribers to lower rate affiliation agreements due to acquisitions. Operating cash flow increased 42% in 2007 due to lower effective rates for the movies that were shown, partially offset by increased costs from a higher ratio of first-run movie exhibitions. Going forward, we will increase original programming on our channels, which will partially offset further forecasted programming cost reductions, but aims to increase customer excitement for Starz. Other Liberty Capital Businesses Starz Media embarked upon its fully integrated media strategy and invested significant time and financial resources in positioning Overture Films, Anchor Bay and its production businesses for long-term success. Starz Media realized losses associated with the start-up of Overture Films and costs related to film and TV projects that had been approved prior to the acquisition of the company. Due to investment in production and marketing costs, we expect losses to continue as we build a library of products for our distribution networks. In 2007, the Atlanta Braves delivered excellent operating performance and high cash flow. The team experienced 6% attendance growth, while producing an 84-78 win/loss 4 record. This year we are not expecting the strong OCF production of 2007, but do anticipate ongoing profitability and are keeping our fingers crossed for a playoff berth. TruePosition, our provider of e-911 and other location-based networks and services, generated significant 2007 billings and meaningful cash, although GAAP revenue was deferred under software revenue recognition accounting. TruePosition redeployed some of this cash in location-based services growth initiatives. WildBlue, a Ka band satellite provider of broadband Internet service to rural and other hard to reach customers, experienced strong 2007 subscriber growth and closed the year with over 280,000 users. The company generated $114 million of annual revenue and produced positive operating cash flow for the first time toward the latter part of the year. FUN Technologies, a casual and skill gaming company, had stellar 2007 results. Our skill gaming business has 17.8 million registered users and generated $69 million of revenue. The company is working closely with GSN on development of new interactive skill games for distribution via the internet and television. Acquisitions and Divestitures In addition to the News Corp exchange, we tax-efficiently converted several Liberty Capital holdings into operating businesses and cash in 2007. In February, we exchanged our common shares in CBS Corporation for a company that holds the CBS affiliate in Green Bay, valued at $64 million, and $170 million in cash. In May, we exchanged 68.5 million shares of Time Warner common stock for a company which holds the Atlanta Braves Baseball Club, Leisure Arts, and $984 million of cash. Liberty retains 103 million shares, or about 3% of Time Warner’s common stock. In December, we acquired the 43% of FUN Technologies that we did not own from the public. These transactions secured operating assets for Liberty Capital and set the stage for the formation of a new tracking stock, Liberty Entertainment, which is focused on television and internet distribution and programming. This reclassification of our Liberty Capital tracking stock was announced in 2007, approved by Liberty’s shareholders in October of last year and completed in March, 2008. This new tracking stock should allow our investors the opportunity to more precisely focus their attention on a strategically aligned group of well positioned television and internet distribution and programming assets and create a currency that may be considered for future acquisitions. Capital Structure and Liquidity At year end 2007, Liberty Capital was attributed with approximately $15.6 billion of public investments and derivatives. In addition to its 5 public holdings, Liberty Capital had attributed cash and liquid investments of about $2.7 billion. Total cash and public holdings approximated $18.3 billion and were only partially offset by the $5.3 billion face amount of attributed debt. These figures include our holdings in News Corp. that were subsequently exchanged in February 2008. In April 2007, Liberty arranged for $750 million of bank financing in an attractive structure to invest in a portfolio of selected debt and mezzanine-level instruments of telecommunications, media and technology companies with favorable risk/return profiles. We will be opportunistic with these investments and to date only a small portion of this facility has been invested. In March 2008, to induce holders of our 0.75% Time Warner Exchangeable Senior Debentures due 2023 not to put these debentures to us, we modified certain debenture terms, including raising the interest rate paid to 3.125%. Liberty eventually repurchased $486.1 million of the $1.75 billion issue. Liberty has substantial access to low-cost capital through its public portfolio, equity derivatives, subsidiaries and cash balances as exemplified by our low-cost $1.9 billion borrowing against a DIRECTV equity collar to fund our April 2008 DIRECTV share purchase. Share Repurchases During 2007, we repurchased 11.5 million Liberty Capital shares or 8.2% of the shares outstanding for $1.3 billion. Looking Ahead The past four years have been a whirlwind of change and advancement at Liberty. So where do we go from here? What is our end game? How do we unlock the discount and drive further shareholder value? These are questions we contemplate daily. As stewards of your equity, our one true, quantifiable measure of success is long-term stock price performance. Our objective is, and will continue to be, driving stock price performance while creating lasting shareholder value. That mission takes on different meanings and requires different actions at each of our tracking stocks and for Liberty Media Corporation as a whole. At Liberty Interactive we will continue to seek organic growth and to use its strong free cash flow to make accretive acquisitions and opportunistically shrink its equity. The newly reclassified Liberty Capital’s objective is, as it has been for the past two years, to rationalize non-core holdings tax-efficiently, simplify assets, and strive toward becoming an operating business. While we have successfully completed many transactions in line with this strategy, significant challenges remain and we recognize that consolidating, setting strategy for, developing synergies for, having access to the cash flows of, and setting appropriate capitalizations for our businesses is likely to yield the highest public market value for our Liberty Capital shareholders. 6 Our objective at Liberty Entertainment is to close the trading discount and achieve fair value for its investments and businesses. This would increase shareholder value and create a currency that, along with cash, could be used to make accretive, complementary investments in the programming and distribution space, including potentially consolidating DIRECTV. While significant strategic questions remain, we believe we made strong progress in 2007 toward creating better options at each of our tracking stock groups and are excited about the opportunities to achieve our goals. We have further refined the investment options, created additional operational focus and maintained strong balance sheets and financial flexibility. We are excited by our outlook, eager to tackle the challenges of the year ahead, and appreciate your ongoing support of Liberty. Very truly yours, 28MAR200617334700 Gregory B. Maffei President and Chief Executive Officer 25MAY200419071722 John C. Malone Chairman of the Board 1 Liberty defines operating cash flow (OCF) as revenue less cost of sales; operating expenses; and selling, general and administrative expenses (excluding stock and other equity-based compensation). OCF, as defined by Liberty, excludes depreciation and amortization, stock and other equity-based compensation and restructuring and impairment charges that are included in the measurement of operating income pursuant to U.S. generally accepted accounting principles (GAAP). Liberty believes OCF 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. Because OCF is used as a measure of operating performance, Liberty views operating income as the most directly comparable GAAP measure. OCF is not meant to replace or supersede operating income or any other GAAP measure, but rather to supplement the information to present investors with the same information as Liberty’s management considers in assessing the results of operations and performance of its assets. Please see footnote 20 to our accompanying consolidated financial statements for a reconciliation of OCF to earnings (loss) before income taxes and minority interest. 2 Due to the date of the acquisition, Bodybuilding.com’s results are not included in our 2007 financials. 7 The Inc.) predecessor The following graph compares the historical combined performance of the Liberty Capital Series A and Liberty Interactive Series A tracking stocks and their predecessor securities from August 1995 through December 31, 2007, in comparison to our peers (News Corporation, CBS Corporation, The Walt Disney Company and Time Warner, of (1) Tele-Communications Inc. Series A Liberty Media Group tracking stock (Nasdaq trading symbol: LBTYA) for the period from August 1995 until March 1999, (2) AT&T Corp. Class A Liberty Media Group tracking stock (NYSE trading symbol: LMG.A) for the period from March 1999 until August 2001, and (3) the former Liberty Media Corporation Series A common stock (NYSE trading symbol: originally LMC.A but subsequently changed to L) for the period from August 2001 until the May 9, 2006 restructuring (in which such stock was exchanged for our Liberty Capital Series A and Liberty Interactive Series A tracking stocks). comprised securities are Historical Performance of Pre- and Post-Restructuring Liberty Compared to Peers 1000% 900% 800% 700% 600% 500% 400% 300% 200% 100% 0% -100% S ep-95 D ec-95 D ec-96 D ec-97 D ec-98 D ec-99 D ec-00 D ec-01 D ec-02 D ec-03 D ec-04 D ec-05 D ec-06 D ec-07 LINTA/LCAPA* NWS/A (post reincorp.) CBS DIS TWX (converted) 18APR200821462615 * Including predecessor securities 8 The following graph compares the yearly percentage change in the cumulative total shareholder return on the former Liberty Media Corporation Series A and Series B common stock from December 31, 2002 through December 31, 2007, in comparison to the S&P 500 Media Index, which reflects the performance of companies in our peer group, and the S&P 500 Index. We have included in the returns presented below the estimated values attributable to the dividends paid in connection with the June 2004 spin off of Liberty Media International, Inc. and the July 2005 spin off of Discovery Holding Company. For periods subsequent to our May 9, 2006 restructuring in which we issued two new tracking stocks—Liberty Capital common stock and Liberty Interactive common stock—we have combined the tracking stock closing market prices based on the ratios used to issue such stocks. Historical Performance of Pre-Restructuring Liberty Compared to Select Indices $180 $170 $160 $150 $140 $130 $120 $110 $100 12/31/02 12/31/03 12/31/04 12/31/05 12/31/06 12/31/07 Liberty Series A Liberty Series B S&P Media Index S&P 500 Index 18APR200821462751 12/31/02 12/31/03 12/31/04 12/31/05 12/31/06 12/31/07 Liberty Series A . . . . . . . . . . . . . . . . Liberty Series B . . . . . . . . . . . . . . . . S&P Media Index . . . . . . . . . . . . . . S&P 500 Index . . . . . . . . . . . . . . . . $100.00 $100.00 $100.00 $100.00 $133.00 $150.00 $127.29 $126.38 $143.06 $147.83 $122.92 $137.75 $124.83 $125.65 $106.48 $141.88 $151.92 $150.95 $137.68 $161.20 $155.31 $153.31 $114.70 $166.89 9 The following graph compares the percentage change in the cumulative total shareholder return on each of the Liberty Capital Series A and Series B tracking stocks and the Liberty Interactive Series A and Series B tracking stocks from May 10, 2006 through December 31, 2007, in comparison to the S&P 500 Media Index and the S&P 500 Index. Historical Performance of Post-Restructuring Liberty Compared to Select Indices $150 $125 $100 $75 5/10/06 12/31/06 12/31/07 Liberty Capital Series A Liberty Capital Series B Liberty Interactive Series A Liberty Interactive Series B S&P Media Index S&P 500 Index 18APR200821462483 Liberty Capital Series A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Liberty Capital Series B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Liberty Interactive Series A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Liberty Interactive Series B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S&P Media Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S&P 500 Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $100.00 $100.00 $100.00 $100.00 $100.00 $100.00 $122.09 $121.50 $110.90 $111.76 $120.41 $107.03 $145.16 $144.25 $ 98.10 $ 97.34 $100.31 $110.81 5/10/2006 12/31/2006 12/31/2007 10 LIBERTY MEDIA CORPORATION INVESTMENT SUMMARY (as of March 31, 2008) Liberty Media Corporation owns interests in a broad range of electronic retailing, media, communications and entertainment businesses. Those interests are attributed to three tracking stock groups: Liberty Capital, Liberty Entertainment, and Liberty Interactive. The following table sets forth some of Liberty Media’s major assets that are held directly and indirectly through partnerships, joint ventures, common stock investments and instruments convertible into common stock. Ownership percentages in the table are approximate and, where applicable, assume conversion to common stock by Liberty Media and, to the extent known by Liberty Media, other holders. In some cases, Liberty Media’s interest may be subject to buy/sell procedures, repurchase rights or dilution. LIBERTY CAPITAL ENTITY Atlanta National League Baseball Club, Inc. Current Group, LLC Embarq Corporation (NYSE: EQ) GoPets, Ltd. Hallmark Entertainment Investments Co. DESCRIPTION OF OPERATING BUSINESS Owner of the Atlanta Braves, a major league baseball club, as well as certain of the Atlanta Braves’ minor league clubs. Provider of Broadband over Powerline (BPL) solutions and services to electric distribution companies. Provider of a suite of communications services to customers in its local services territories, including local and long distance voice, data, high speed internet, wireless and entertainment services. Virtual community of pets that interact with each other and other users all over the world. Owner of controlling interest in Crown Media Holdings, Inc., the owner and operator of U.S. cable television channels, including the Hallmark Channel. ATTRIBUTED OWNERSHIP 100% 8%(1) 3% 28% 11%(2) 11 ENTITY Jingle Networks, Inc. Kroenke Arena Company, LLC Leisure Arts, Inc. LodgeNet Entertainment Corporation (Nasdaq: LNET) MacNeil/Lehrer Productions Motorola, Inc. (NYSE: MOT) Overture Films, LLC priceline.com, Incorporated (Nasdaq: PCLN) Sprint Nextel Corporation (NYSE: S) Starz Media, LLC (formerly IDT Entertainment) ATTRIBUTED OWNERSHIP 9%(3) 6.5% 100% 9% 67% 3% 100% 1% 3%(4) 100% DESCRIPTION OF OPERATING BUSINESS Operator of the advertiser-supported 1.800.FREE411 service which allows callers to obtain residential, business and government telephone numbers for no charge. Owner of the Denver Nuggets basketball team, the Colorado Avalanche hockey team and the Pepsi Center, a sports and entertainment facility in Denver, Colorado. Publisher and marketer of needlework, craft, decorating, entertaining and other lifestyle interest ‘‘how-to’’ books. Provider of media and connectivity services designed to meet the unique needs of hospitality, healthcare and other visitor and guest-based businesses. Producer of ‘‘The NewsHour with Jim Lehrer’’ in addition to documentaries, web sites, interactive DVD’s, civic engagement projects and educational programs. Provider of integrated communications solutions and embedded electronic solutions. Motion picture studio plans to make 8 to 12 feature-length films a year. Provider of an e-commerce service allowing consumers to make offers on products and services. Provider of a comprehensive range of communications services bringing mobility to consumer, business and government customers. Creator and distributor of animated and live-action programming, creator of content under contract for other media companies, and leading independent home video/DVD entertainment company. 12 ENTITY Time Warner Inc. (NYSE: TWX) TruePosition, Inc. Viacom Inc. (NYSE: VIA) WFRV and WJMN Television Station, Inc. DESCRIPTION OF OPERATING BUSINESS Media and entertainment company whose businesses include filmed entertainment, interactive services, television networks, cable systems, music and publishing. Developer and implementer of advanced wireless location products, services and devices in a cross-carrier environment, including potential for use in connection with social networks, mobile gaming companies, search companies, mobile advertisers and providers of music, comedy and entertainment content to wireless devices. Global media company, with positions in broadcast and cable television, radio, outdoor advertising, and online. Brands include CBS, MTV, Nickelodeon, Nick at Nite, VH1, BET, Paramount Pictures, Infinity Broadcasting, Viacom Outdoor, UPN, TV Land, Comedy Central, CMT: Country Music Television, Spike TV, Showtime, Blockbuster, and Simon & Schuster. CBS broadcast affiliate that serves Green Bay, Wisconsin and Escanaba, Michigan. ATTRIBUTED OWNERSHIP 3% 100% 1% 100% 13 LIBERTY ENTERTAINMENT ENTITY The DIRECTV Group, Inc. (NASDAQ: DTV) FUN Technologies Inc. Game Show Network, LLC Liberty Sports Holdings, LLC Starz Entertainment, LLC WildBlue Communications, Inc. DESCRIPTION OF OPERATING BUSINESS Provider of digital television entertainment services to more than 16.8 million customers in the United States and over 5.0 million customers in Brazil, Mexico and other countries in Latin America. Online and interactive casual games provider. Provides cutting-edge gaming systems to top distribution partners around the world. Operator of GSN, a cable television channel featuring multi-platform interactive game programs, and GSN.com, an internet gaming site. Provider of sports oriented programming in Denver, Pittsburgh and Seattle and surrounding areas. Provider of video programming distributed by cable operators, direct-to-home satellite providers, other distributors and via the Internet throughout the United States. Provider of two-way broadband Internet access via satellite to homes and small businesses in rural markets underserved by terrestrial broadband alternatives. ATTRIBUTED OWNERSHIP 40.9%(5) 100% 50% 100% 100% 32%(6) 14 LIBERTY INTERACTIVE ENTITY Backcountry.com, Inc. Bodybuilding.com Borba, LLC BUYSEASONS, Inc. Expedia, Inc. (Nasdaq: EXPE) ATTRIBUTED OWNERSHIP 81% 83% 25% 100% 24%(7) DESCRIPTION OF OPERATING BUSINESS E-commerce business that sells performance gear for backcountry adventures, including backpacking, climbing, skiing, snowboarding, trail running and adventure travel. Backcountry.com also operates BackcountryOutlet.com, Dogfunk.com, Tramdock.com, SteepandCheap.com and WhiskeyMilitia.com. E-commerce business that sells supplements, clothing, tanning supplies, accessories and other bodybuilding products as well as hosts an online site where visitors can network and exchange information related to bodybuilding. Provider of full range of netraceutical and cosmeceutical products. Online retailer of costumes, accessories and Halloween products. Empowers business and leisure travelers with the tools and information needed to research, plan, book and experience travel. It also provides wholesale travel to offline retail travel agents. Expedia’s main companies include: Expedia.com, Hotels.com, Hotwire, Expedia Corporate Travel, TripAdvisor and Classic Vacations. Expedia’s companies operate internationally in Canada, the UK, Germany, France, Italy, the Netherlands and China. GSI Commerce, Inc. (Nasdaq: GSIC) Provider of outsourced e-commerce solutions. 19.7% 15 ENTITY IAC/InteractiveCorp (Nasdaq: IACI) Provide Commerce, Inc. QVC, Inc. ATTRIBUTED OWNERSHIP 30%(8) 100% 100% DESCRIPTION OF OPERATING BUSINESS Operator of businesses in sectors being transformed by the internet, online and offline. Comprised of HSN; Cornerstone Brands, Inc.; HSE24; Shoebuy.com; Ticketmaster; Lending Tree; RealEstate.com; ServiceMagic; Match.com; Entertainment Publications; Interval International; Ask.com; Citysearch; Evite; Gifts.com; iBuy; Pronto; and CollegeHumor. E-commerce marketplace company providing a collection of branded websites each offering high quality, perishable products shipped directly from the supplier to the consumer and designed specifically around the way consumers shop. 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. (1) (2) (3) (4) Liberty Media owns interests in Current Group, LLC through two different partnerships, Liberty Associated Partners and Associated Partners. Liberty Media has an approximate indirect 9% economic ownership in Crown Media Holdings, Inc. (NASDAQ: CRWN) through its investment in Hallmark Entertainment Investments Co. Liberty Media owns interests in Jingle Networks, Inc. through two different partnerships, Liberty Associated Partners and Associated Partners. Less than 1% of voting power. Liberty Media beneficially owns shares of Sprint Nextel common stock and instruments convertible into Sprint Nextel common stock. (5) On April 2, 2008 Liberty Media purchased an additional 78.3 million shares of DIRECTV increasing its attributed ownership to approximately 48%. (6) (7) (8) In addition to its approximately 32% equity interest in WildBlue, Liberty Media also owns 53% of a first lien credit facility of WildBlue and 50% of a second lien credit facility of WildBlue. This debt is attributed to Liberty Capital. Liberty Media owns approximately 24% of Expedia common stock representing an approximate 58% voting interest; the Chairman of Expedia currently has the authority to vote these shares. Liberty Media owns approximately 30% of IAC common stock representing an approximate 62% voting interest; the Chairman of IAC currently has the authority to vote these shares. 16 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. Market Information We issued our tracking stocks, Series A and Series B Liberty Capital common stock (LCAPA and LCAPB) and Series A and Series B Liberty Interactive common stock (LINTA and LINTB), on May 10, 2006. Holders of our predecessor’s common stock received .25 of a share of LINTA and .05 of a share of LCAPA in exchange for each share of Series A common stock held and .25 of a share of LINTB and .05 of a share of LCAPB in exchange for each share of Series B common stock held. Each series of our tracking stock trades on the Nasdaq Global Select Market. Prior to May 10, 2006, our two series of common stock, Series A and Series B, traded 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 common stock for the years ended December 31, 2007 and 2006. 2006 First quarter . . . . . . . . . . . . . . . . . . . . . . . . Second quarter through May 9, 2006 . . . . . . . $ $ 8.44 8.76 7.73 8.20 8.50 8.90 7.80 8.20 Series A (L) Series B (LMC.B) High Low High Low Liberty Capital Series A (LCAPA) Series B (LCAPB) High Low High Low 2006 Second quarter—May 10, 2006 through June 30, 2006 . . . . . . . . . . . . . . . . . . . . . . Third quarter . . . . . . . . . . . . . . . . . . . . . . . . Fourth quarter . . . . . . . . . . . . . . . . . . . . . . . $ 83.95 $ 87.02 $ 98.80 77.00 80.01 83.32 87.99 87.25 99.46 79.26 80.73 84.34 2007 First quarter . . . . . . . . . . . . . . . . . . . . . . . . Second quarter . . . . . . . . . . . . . . . . . . . . . . . Third quarter . . . . . . . . . . . . . . . . . . . . . . . . Fourth quarter . . . . . . . . . . . . . . . . . . . . . . . $111.31 $120.74 $126.46 $129.72 96.95 109.09 107.70 110.03 111.50 120.74 126.44 129.91 98.50 110.88 108.07 110.51 Liberty Interactive Series A (LINTA) Series B (LINTB) High Low High Low 2006 Second quarter—May 10, 2006 through June 30, 2006 . . . . . . . . . . . . . . . . . . . . . . Third quarter . . . . . . . . . . . . . . . . . . . . . . . . Fourth quarter . . . . . . . . . . . . . . . . . . . . . . . $ 20.25 $ 20.60 $ 23.29 2007 First quarter . . . . . . . . . . . . . . . . . . . . . . . . Second quarter . . . . . . . . . . . . . . . . . . . . . . . Third quarter . . . . . . . . . . . . . . . . . . . . . . . . Fourth quarter . . . . . . . . . . . . . . . . . . . . . . . $ 25.05 $ 25.89 $ 23.07 $ 23.00 16.28 15.84 19.85 20.90 22.15 17.70 18.95 20.09 20.50 23.13 25.74 25.80 23.13 21.45 15.98 16.00 19.61 21.05 22.19 17.69 19.03 F-1 Holders As of January 31, 2008, there were approximately 2,800 and 100 record holders of our Series A and Series B Liberty Capital common stock, respectively, and approximately 2,300 and 100 record holders of our Series A and Series B Liberty Interactive common stock, respectively. The foregoing numbers of record holders 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. Dividends We have not paid any cash dividends on our 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. Securities Authorized for Issuance Under Equity Compensation Plans Information required by this item is incorporated by reference to our definitive proxy statement for our 2008 Annual Meeting of shareholders. Purchases of Equity Securities by the Issuer Series A Liberty Interactive Common Stock Period (a) Total Number of Shares Purchased (b) Average Price Paid per Share (d) Maximum Number (or Approximate Dollar Value) of Shares that Shares Purchased as Part May Yet Be purchased (c) Total Number of of Publicly Announced Plans or Programs Under the Plans or Programs October 1-31, 2007 . . . . . . . . November 1-30, 2007 . . . . . . December 1-31, 2007 . . . . . . 10,084,944 7,423,200 2,519,593 $19.95 $20.29 $20.23 Total . . . . . . . . . . . . . . . . . 20,027,737 10,084,944 7,423,200 2,519,593 20,027,737 $1,024.7 million $ 873.9 million $ 822.9 million Our program to repurchase shares of Liberty Interactive common stock was approved by our board of directors and disclosed in our 2006 Annual Proxy dated April 7, 2006. In November 2006, our board of directors increased the aggregate amount of Liberty Interactive common stock that can be repurchased from $1 billion to $2 billion, and in October 2007, our board of directors increased the amount that can be repurchased to $3 billion. We may alter or terminate the program at any time. In addition to the shares listed in the table above, 712 shares of Series A Liberty Capital common stock and 1,897 shares of Series A Liberty Interactive common stock were surrendered in the fourth quarter of 2007 by certain of our officers to pay withholding taxes in connection with the vesting of their restricted stock. F-2 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. Summary Balance Sheet Data: Investments in available-for-sale securities and other cost investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment in affiliates . . . . . . . . . . . . . . . . . . . . . . . . . Assets of discontinued operations . . . . . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term debt(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . Summary Statement of Operations Data: Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating income (loss)(2) . . . . . . . . . . . . . . . . . . . . . . Realized and unrealized gains (losses) on financial instruments, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gains (losses) on dispositions, net . . . . . . . . . . . . . . . . . Other than temporary declines in fair value of December 31, 2007 2006 2005 2004 2003 amounts in millions $17,569 $ 1,817 $ — $45,649 $11,524 $19,586 21,622 1,842 512 47,638 8,909 21,633 18,489 1,908 516 41,965 6,370 19,120 21,834 784 6,258 50,181 8,566 24,586 19,544 745 9,741 54,225 9,417 28,842 Years ended December 31, 2007 2006 2005 2004 2003(4) amounts in millions, except per share amounts $ 9,423 738 $ 8,613 1,021 7,646 944 6,743 788 2,934 (841) $ 1,269 646 $ (279) 607 257 (361) (1,284) 1,411 (661) 1,128 investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (33) (4) (449) (129) (22) Earnings (loss) from continuing operations(2): Liberty common stock . . . . . . . . . . . . . . . . . . . . . . . . Liberty Capital common stock . . . . . . . . . . . . . . . . . . Liberty Interactive common stock . . . . . . . . . . . . . . . . Basic earnings (loss) from continuing operations per common share(3): Liberty common stock . . . . . . . . . . . . . . . . . . . . . . . . Series A and Series B Liberty Capital common stock . . Series A and Series B Liberty Interactive common $ — 1,524 441 $ 1,965 $ — $ 11.55 stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ .70 Diluted earnings (loss) from continuing operations per common share(3): Liberty common stock . . . . . . . . . . . . . . . . . . . . . . . . Series A and Series B Liberty Capital common stock . . Series A and Series B Liberty Interactive common $ — $ 11.46 stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ .69 190 33 486 709 .07 .24 .73 .07 .24 .73 (43) — — (43) (.02) — — (.02) — — 105 — — 105 1,144 — — (1,144) .04 — — .04 — — (.42) — — (.42) — — (1) Excludes the call option portion of our exchangeable debentures for periods prior to January 1, 2007. See note 4 to our consolidated financial statements. F-3 (2) Our 2003 operating loss and loss from continuing operations include a $1,352 million goodwill impairment charge related to our wholly-owned subsidiary, Starz Entertainment, LLC. (3) Basic and diluted earnings per share have been calculated for Liberty Capital and Liberty Interactive common stock for periods subsequent to May 9, 2006. EPS has been calculated for Liberty common stock for all periods prior to May 10, 2006. (4) On September 17, 2003, we completed our acquisition of Comcast Corporation’s approximate 56% 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 42% of QVC, we owned 98% 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. 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 controlling and non-controlling interests in a broad range of video and on-line commerce, media, communications and entertainment companies. Our more significant operating subsidiaries, which are also our principal reportable segments, are QVC, Inc. and Starz Entertainment, LLC. QVC markets and sells a wide variety of consumer products in the United States 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. Starz Entertainment provides premium programming distributed by cable operators, direct-to-home satellite providers, other distributors and via the Internet throughout the United States. In 2006, we began implementing a strategy to convert investments into operating businesses. In August 2006, we exchanged our cost investment in IDT Corporation for IDT’s subsidiary IDT Entertainment, which is now known as Starz Media. Also in 2006, we acquired controlling interests in Provide Commerce, Inc., FUN Technologies, Inc. and BuySeasons, Inc. In 2007, (1) we exchanged our shares of CBS Corporation Class B common stock for a subsidiary of CBS that holds WFRV and WJMN Television Station, Inc. and approximately $170 million in cash, (2) we exchanged approximately 68.5 million shares of Time Warner Inc. common stock for a subsidiary of Time Warner which holds Atlanta National League Baseball Club, Inc., Leisure Arts, Inc. and $984 million in cash and (3) we acquired a controlling interest in each of Backcountry.com, Inc. and Bodybuilding.com, LLC. In February 2008, we exchanged our investment in News Corporation for a News Corporation subsidiary which owns News Corporations’ approximate 41% interest in The DIRECTV Group, three regional sports television networks and $465 million in cash (the ‘‘News Corporation Exchange’’). Our ‘‘Corporate and Other’’ segment includes our other consolidated subsidiaries and corporate expenses. Our other consolidated subsidiaries include Provide Commerce, Inc., Starz Media, LLC, FUN Technologies, Inc., Atlanta National League Baseball Club, Inc., Leisure Arts, Inc., TruePosition, Inc., BuySeasons, Inc., Backcountry.com, Inc., Bodybuilding.com, LLC and WFRV and WJMN Television Station, Inc. (‘‘WFRV TV Station’’). Provide, which we acquired in February 2006, operates an e-commerce marketplace of websites for perishable goods, including flowers, gourmet foods, fruits and desserts. Starz Media, which we acquired in the third quarter of 2006, is focused on developing, acquiring, producing and distributing live-action and animated films and television productions for the home video, film, broadcast and direct-to-consumer markets. FUN, in which we acquired a controlling interest in March 2006, operates websites that offer casual gaming, sports information and fantasy F-4 sports services. Atlanta National League Baseball Club, Inc. (‘‘ANLBC’’), which we acquired in May 2007, owns the Atlanta Braves, a major league baseball club, as well as certain of the Atlanta Braves’ minor league clubs. Leisure Arts, which we acquired in May 2007, publishes and markets needlework, craft, decorating, entertaining and other lifestyle interest ‘‘how-to’’ books. TruePosition provides equipment and technology that deliver location-based services to wireless users. BuySeasons, which we acquired in August 2006, operates BuyCostumes.com, an on-line retailer of costumes, accessories, d´ecor and party supplies. Backcountry, which we acquired in June 2007, operates six websites offering outdoor and backcountry sports gear and clothing. Bodybuilding.com, which we acquired on December 31, 2007, manages two websites related to sports nutrition, body building and fitness. WFRV TV Station, which we acquired in April 2007, is a CBS broadcast affiliate that serves Green Bay, Wisconsin and Escanaba, Michigan. In addition to the foregoing businesses, we hold an approximate 24% interest in Expedia, Inc., which we account for as an equity method investment, and we continue to maintain significant investments and related financial instruments in public companies such as IAC/InterActiveCorp, Time Warner Inc. and Sprint Nextel Corporation, which are accounted for at their respective fair market value and are included in corporate and other. Tracking Stocks On May 9, 2006, we completed a restructuring pursuant to which we were organized as a new holding company, and we became the new publicly traded parent company of Liberty Media LLC, which was formerly known as Liberty Media Corporation, and which we refer to as ‘‘Old Liberty.’’ As a result of the restructuring, all of the Old Liberty outstanding common stock was exchanged for our two new tracking stocks, Liberty Interactive common stock and Liberty Capital common stock. Each tracking stock issued in the restructuring is intended to track and reflect the economic performance of one of two groups, the Interactive Group and the Capital Group, respectively. A tracking stock is a type of common stock that the issuing company intends to reflect or ‘‘track’’ the economic performance of a particular business or ‘‘group,’’ rather than the economic performance of the company as a whole. While the Interactive Group and the Capital Group have separate collections of businesses, assets and liabilities attributed to them, neither group is a separate legal entity and therefore cannot own assets, issue securities or enter into legally binding agreements. Holders of tracking stocks have no direct claim to the group’s stock or assets and are not represented by separate boards of directors. Instead, holders of tracking stock are stockholders of the parent corporation, with a single board of directors and subject to all of the risks and liabilities of the parent corporation. The term ‘‘Interactive Group’’ does not represent a separate legal entity, rather it represents those businesses, assets and liabilities which we have attributed to it. The assets and businesses we have attributed to the Interactive Group are those engaged in video and on-line commerce, and include our subsidiaries QVC, Provide, BuySeasons, Backcountry and Bodybuilding and our interests in Expedia and IAC/InterActiveCorp. The Interactive Group will also include such other businesses that our board of directors may in the future determine to attribute to the Interactive Group, including such other businesses as we may acquire for the Interactive Group. In addition, we have attributed $3,108 million principal amount (as of December 31, 2007) of our senior notes and debentures to the Interactive Group. The term ‘‘Capital Group’’ also does not represent a separate legal entity, rather it represents all of our businesses, assets and liabilities other than those which have been attributed to the Interactive Group. The assets and businesses attributed to the Capital Group include our subsidiaries Starz Entertainment, Starz Media, ANLBC, FUN, TruePosition, Leisure Arts and WFRV TV Station, our equity affiliates GSN, LLC and WildBlue Communications, Inc. and our interests in News Corporation, Time Warner Inc. and Sprint Nextel Corporation. The Capital Group will also include such other F-5 businesses that our board of directors may in the future determine to attribute to the Capital Group, including such other businesses as we may acquire for the Capital Group. In addition, we have attributed $4,481 million principal amount (as of December 31, 2007) of our senior exchangeable debentures and $750 million of our bank debt to the Capital Group. See Exhibit 99.1 to this Annual Report on Form 10-K for unaudited attributed financial information for our tracking stock groups. Proposed Tracking Stocks On October 23, 2007, our stockholders approved a group of related proposals to amend and restate our certificate of incorporation to reclassify our Liberty Capital common stock into two new tracking stocks, one to retain the designation Liberty Capital common stock and the other to be designated the Liberty Entertainment common stock. The reclassification was contingent upon the completion of the News Corporation Exchange pursuant to which we exchanged our approximate 16% ownership interest in News Corporation for a subsidiary of News Corporation which holds an approximate 41% interest in The DIRECTV Group, Inc., three regional sports television networks and approximately $465 million in cash. We currently expect the reclassification to be implemented in March 2008. The Liberty Entertainment common stock would be intended to track and reflect the separate economic performance of a newly designated Entertainment Group, which initially would have attributed to it a portion of the businesses, assets and liabilities that are currently attributed to the Capital Group, including our subsidiaries Starz Entertainment and FUN, our equity interests in GSN, LLC and WildBlue Communications, Inc. and approximately $500 million of cash and $551 million principal amount (as of December 31, 2007) of our publicly-traded debt. In addition, we would attribute to the Entertainment Group all of the businesses and assets received in the News Corporation Exchange. Upon implementation of the reclassification, the Capital Group would have attributed to it all of our businesses, assets and liabilities not attributed to the Interactive Group or the Entertainment Group, including our subsidiaries Starz Media, ANLBC, Leisure Arts, TruePosition and WFRV TV Station, and minority equity investments in Time Warner Inc. and Sprint Nextel Corporation. In addition, the Capital Group would have attributed to it $3,930 million principal amount (as of December 31, 2007) of our existing publicly-traded debt and $750 million of our bank debt. The reclassification would not change the businesses, assets and liabilities currently attributed to our Interactive Group. 2007 Completed Transactions In addition to the sales of OPTV and AEG discussed under ‘‘Discontinued Operations’’ below, we have several other completed transactions in 2007. Among these are: On April 16, 2007, we completed an exchange transaction (the ‘‘CBS Exchange’’) with CBS Corporation pursuant to which we exchanged our 7.6 million shares of CBS Class B common stock valued at $239 million for a subsidiary of CBS that holds WFRV TV Station and approximately $170 million in cash. On May 17, 2007, we completed an exchange transaction (the ‘‘Time Warner Exchange’’) with Time Warner Inc. in which we exchanged approximately 68.5 million shares of Time Warner common stock valued at $1,479 million for a subsidiary of Time Warner which holds ANLBC, Leisure Arts and $984 million in cash. F-6 On June 22, 2007, we acquired 81.3% of the outstanding capital stock of Backcountry.com, Inc. for cash consideration of $120 million, of which $11 million will be held in escrow for one year following the closing to satisfy any indemnification claims. On December 31, 2007, we acquired 82.9% of the outstanding equity of Bodybuilding.com, LLC for cash consideration of $116 million, of which $5 million will be held in escrow for one year following the closing to satisfy any indemnification claims. Discontinued Operations In the fourth quarter of 2006, we committed to two separate transactions pursuant to which we intended to sell our interests in OpenTV Corp and Ascent Entertainment Group (‘‘AEG’’) to unrelated third parties. The sale of OpenTV for approximately $132 million in cash was completed in January 2007. Pursuant to an agreement with OpenTV, we paid OpenTV approximately $5 million of the sales proceeds at closing and approximately $14 million of the sales proceeds on the first anniversary of the closing upon the satisfaction of certain conditions. The sale of AEG, of which the primary asset is 100% of the common stock of On Command Corporation, for $332 million in cash and 2.05 million shares of common stock of the buyer valued at approximately $50 million was completed in April 2007. OpenTV and AEG each met the criteria of Statement of Financial Accounting Standards No. 144, ‘‘Accounting for the Impairment or Disposal of Long-Lived Assets,’’ for classification as assets held for sale as of December 31, 2006 and were included in the Capital Group. On July 21, 2005, we completed the spin off of our wholly-owned subsidiary, Discovery Holding Company (‘‘DHC’’), to our shareholders. At the time of the spin off, DHC’s assets were comprised of our 100% ownership interest in Ascent Media Group, our 50% ownership interest in Discovery Communications, Inc. and $200 million in cash. The spin off is intended to qualify as a tax-free spin off. We recognized no gain or loss in connection with the spin off due to the pro rata nature of the distribution. Our consolidated financial statements and accompanying notes have been prepared to reflect OpenTV, AEG and DHC as discontinued operations. Accordingly, the assets and liabilities, revenue, costs and expenses, and cash flows of these subsidiaries have been excluded from the respective captions in the accompanying consolidated balance sheets, statements of operations, statements of comprehensive earnings (loss) and statements of cash flows and have been reported under the heading of discontinued operations in such consolidated financial statements. Strategies and Challenges of Business Units QVC faced several challenges in 2007 that adversely impacted revenue and operating cash flow growth. QVC intends to continue addressing those challenges in 2008. Domestically, revenue and operating cash flow growth were negatively impacted by general economic conditions, and to a lesser extent, higher precious metals prices and increased penetration of satellite television which hinders QVC’s ability to gain favorable channel positioning. In the fall of 2007, QVC launched a national branding campaign to help drive awareness of its programming and products and increase revenue. In 2008, QVC intends to continue its branding campaign to the extent it yields positive results, freshen its product mix and programming, enhance and optimize its website and implement cost control measures. In 2007, international results were negatively impacted by a number of factors. Results in Germany were hurt by increased competition and a soft retail market, as well as QVC-Germany’s over-reliance on certain categories of products. In 2008, QVC-Germany intends to diversify its programming and product mix and increase its focus on underperforming product categories. In Japan, a heightened regulatory focus on health and beauty product presentations restricted QVC-Japan’s ability to sell such products which have historically comprised in excess of 40% of QVC-Japan’s sales. In addition, the F-7 migration of Japanese viewers from analog to digital and the resulting increase in channels available to Japanese viewers has hurt QVC’s ability to obtain and retain customers. In 2008, QVC-Japan intends to stabilize the health and beauty category and grow its product categories other than health and beauty. The key challenges to achieving these goals in both the U.S. and international markets are (1) increased competition from other home shopping and Internet retailers, (2) macro-economic conditions, (3) advancements in technology, such as video on demand and personal video recorders, which may alter TV viewing habits, (4) maintaining favorable channel positioning as digital TV penetration increases and (5) successful management transition. In 2007, Starz Entertainment’s operating cash flow improved primarily due to reductions in programming costs, and to a lesser extent, increases in revenue and cost containment initiatives. Such reductions in programming costs were achieved primarily due to lower theatrical performance of movies exhibited by Starz Entertainment. In 2008, Starz Entertainment’s primary goal will be to improve operating cash flow by increasing revenue. Starz Entertainment hopes to increase revenue by (i) improving brand awareness, (ii) selling suites of services, including high definition, on demand and linear program offerings and (iii) launching original programming on the Starz channel. Another key initiative for Starz Entertainment in 2008 is to negotiate new affiliation agreements with key distributors. Starz Entertainment faces several key obstacles in its attempt to meet these goals, including: (1) cable operators’ promotion of bundled service offerings rather than premium video services; (2) the impact on viewer habits of new technologies such as personal video recorders; (3) continued consolidation in the broadband and satellite distribution industries; and (4) an increasing number of alternative movie and programming sources. Results of Operations General. We provide in the tables below information regarding our Consolidated Operating Results and Other Income and Expense, as well as information regarding the contribution to those items of our reportable segments categorized by the tracking stock group to which those segments are attributed. The ‘‘corporate and other’’ category for each tracking stock group consists of those assets within the category which are attributed to such tracking stock group. For a more detailed discussion and analysis of the financial results of the principal reporting segments of each tracking stock group, see ‘‘Interactive Group’’ and ‘‘Capital Group’’ below. F-8 Consolidated Operating Results Years ended December 31, 2007 2006 2005 amounts in millions Revenue Interactive Group QVC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Corporate and other . . . . . . . . . . . . . . . . . . . . . . . . . . $7,397 405 7,074 252 6,501 — Capital Group Starz Entertainment . . . . . . . . . . . . . . . . . . . . . . . . . . Starz Media . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Corporate and other . . . . . . . . . . . . . . . . . . . . . . . . . . 7,802 7,326 6,501 1,066 254 301 1,033 86 168 1,004 — 141 1,621 1,287 1,145 Consolidated Liberty . . . . . . . . . . . . . . . . . . . . . . . . $9,423 8,613 7,646 Operating Cash Flow (Deficit) Interactive Group QVC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Corporate and other . . . . . . . . . . . . . . . . . . . . . . . . . . $1,652 32 1,656 24 1,422 (5) Capital Group Starz Entertainment . . . . . . . . . . . . . . . . . . . . . . . . . . Starz Media . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Corporate and other . . . . . . . . . . . . . . . . . . . . . . . . . . 1,684 1,680 1,417 264 (143) (76) 45 186 (24) (59) 103 171 — (47) 124 Consolidated Liberty . . . . . . . . . . . . . . . . . . . . . . . . $1,729 1,783 1,541 Operating Income (Loss) Interactive Group QVC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Corporate and other . . . . . . . . . . . . . . . . . . . . . . . . . . $1,114 (1) 1,130 — Capital Group . . . . . . . . . . . . . . . . . . . . . . . . . . Starz Entertainment Starz Media . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Corporate and other . . . . . . . . . . . . . . . . . . . . . . . . . . 1,113 1,130 210 (342) (243) 163 (29) (243) (375) (109) Consolidated Liberty . . . . . . . . . . . . . . . . . . . . . . . . $ 738 1,021 921 (5) 916 105 — (77) 28 944 Revenue. Our consolidated revenue increased 9.4% in 2007 and 12.6% in 2006, as compared to the corresponding prior year. The 2007 increase is due to a $323 million or 4.6% increase for QVC, our acquisition of Starz Media in August 2006 ($168 million increase), our acquisition of ANLBC in May 2007 ($159 million increase) and the combined impact of our 2006 and 2007 acquisitions of e-commerce businesses ($153 million increase). The 2006 increase is due primarily to an 8.8% or $573 million increase at QVC and our 2006 acquisitions of Provide ($220 million), Starz Media ($86 million), FUN ($42 million) and BuySeasons ($32 million). See Management’s Discussion and F-9 Analysis for the Interactive Group and the Capital Group below for a more complete discussion of QVC’s and Starz Entertainment’s results of operations. In November 2006, TruePosition signed an amendment to its existing services contract with AT&T Corp. (formerly Cingular Wireless) that requires TruePosition to develop and deliver additional software features. Because TruePosition does not have vendor specific objective evidence related to the value of these additional features, TruePosition is required to defer revenue recognition until all of the features have been delivered. TruePosition currently estimates that these features will be delivered at the end of 2008. Accordingly, absent any further contractual changes, TruePosition will not recognize any significant revenue under this contract until the first quarter of 2009. TruePosition recognized approximately $105 million of revenue under this contract in 2006 prior to signing the amendment. TruePosition’s services contract with its other major customer, T-Mobile, Inc., has a similar provision which prevents TruePosition from recognizing revenue. Such contract expires in June 2008, but contains provisions allowing T-Mobile to extend. It should be noted that both AT&T and T-Mobile are paying currently for services they receive and that the aforementioned deferrals have normal gross profit margins included. 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 to evaluate our businesses and make decisions about allocating resources among our businesses. We believe this is an important indicator of the operational strength and performance of our businesses, including each business’s ability to service debt and fund capital expenditures. In addition, this measure allows us to view operating results, perform analytical comparisons and benchmarking between businesses and identify strategies to improve performance. This measure of performance excludes such costs as depreciation and amortization, stock compensation, separately disclosed litigation settlements and impairments of long-lived assets that are included in the measurement of operating income pursuant to generally 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 note 20 to the accompanying consolidated financial statements for a reconciliation of Operating Cash Flow to Earnings (Loss) From Continuing Operations Before Income Taxes and Minority Interest. Consolidated Operating Cash Flow decreased $54 million or 3.0% and increased $242 million or 15.7% in 2007 and 2006, respectively, as compared to the corresponding prior year. In 2007, operating cash flow deficits for Starz Media and TruePosition increased $119 million and $75 million, respectively, compared to 2006. These cash flow decreases were partially offset by increases for Starz Entertainment and ANLBC of $78 million and $38 million, respectively. Starz Media’s operating cash flow deficit resulted from (i) the $79 million write-off of capitalized production costs due to the abandonment of certain films and downward adjustments to the revenue projections for certain TV series and other films, (ii) start up costs for Overture Films and the delay of film release dates into 2008 and (iii) lower than expected revenue for Anchor Bay, its DVD distribution division. We currently expect Starz Media to continue incurring operating cash flow deficits and operating losses for the next two to three years. TruePosition’s operating cash flow deficit was due in large part to the deferral of revenue under its AT&T and T-Mobile contracts described above. QVC’s operating cash flow decreased marginally in 2007. The 2006 increase in our consolidated operating cash flow is due to a $234 million or 16.5% increase at QVC and a $15 million or 8.8% increase at Starz Entertainment. Operating cash flow in 2006 for Provide of $24 million and BuySeasons of $6 million were offset by operating cash flow deficits for Starz Media of $24 million and FUN of $11 million. Stock-based compensation. Stock-based compensation includes compensation related to (1) options and stock appreciation rights (‘‘SARs’’) for shares of our common stock that are granted to certain of F-10 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. Effective January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123R (revised 2004), ‘‘Share-Based Payment’’ (‘‘Statement 123R’’). Statement 123R requires that we amortize the grant date fair value of our stock option awards that qualify as equity awards as stock compensation expense over the vesting period of such awards. Statement 123R also requires that we record our liability awards at fair value each reporting period and that the change in fair value be reflected as stock compensation expense in our consolidated statements of operations. Prior to adoption of Statement 123R, the amount of expense associated with stock-based compensation was generally based on the vesting of the related stock options and stock appreciation rights and the market price of the underlying common stock, as well as the vesting of PSARs and the equity value of the related subsidiary. The expense reflected in our consolidated financial statements was based on the market price of the underlying common stock as of the date of the financial statements. In connection with our adoption of Statement 123R, we recorded an $89 million transition adjustment loss, net of related income taxes of $31 million, which primarily reflects the fair value of the liability portion of QVC’s stock option awards at January 1, 2006. The transition adjustment is reflected in the accompanying consolidated statement of operations as the cumulative effect of accounting change. In addition, we recorded $93 million, $67 million and $52 million of stock compensation expense for the years ended December 31, 2007, 2006 and 2005, respectively. The 2006 stock compensation expense is net of a $24 million credit related to the terminations of QVC’s stock option plan as described in note 15 to the accompanying consolidated financial statements. As of December 31, 2007, the total unrecognized compensation cost related to unvested Liberty equity awards was approximately $81 million. Such amount will be recognized in our consolidated statements of operations over a weighted average period of approximately 2 years. Depreciation and amortization. Depreciation and amortization increased in 2007 and 2006 due to our acquisitions and capital expenditures partially offset by a decrease at Starz Entertainment due to certain intangibles becoming fully amortized. As the businesses we acquired in 2007 and 2006 are not capital intensive, we do not expect them to have a significant impact on our depreciation in the future. Impairment of long-lived assets. In connection with our 2007 annual evaluation of the recoverability of Starz Media’s goodwill, we estimated the fair value of Starz Media’s reporting units using a combination of discounted cash flows and market comparisons and concluded that the carrying value of certain reporting units exceeded their respective fair values. Accordingly, we recognized a $182 million impairment charge related to goodwill. During the third quarter of 2007, FUN recognized a $41 million impairment loss related to its sports information segment due to new competitors in the marketplace and the resulting loss of revenue and operating income. We acquired our interest in FUN in March 2006. Subsequent to our acquisition, the market value of FUN’s stock declined significantly due to the performance of certain of FUN’s subsidiaries and uncertainty surrounding government legislation of Internet gambling which we believe the market perceived as potentially impacting FUN’s skill gaming business. In connection with our 2006 annual evaluation of the recoverability of FUN’s goodwill, we estimated the fair value of FUN using a combination of discounted cash flows and market comparisons and concluded that the carrying value of FUN’s goodwill exceeded its market value. Accordingly, we recognized a $111 million impairment charge related to goodwill and a $2 million impairment charge related to trademarks. F-11 Operating income. We generated consolidated operating income of $738 million, $1,021 million and $944 million in 2007, 2006 and 2005, respectively. The 2007 decrease in operating income is due primarily to increased operating losses of $313 million for Starz Media and $73 million for TruePosition. These losses were partially offset by improved operating results of $83 million for FUN and $47 million for Starz Entertainment. The improvement in FUN’s operating loss from $140 million to $57 million was largely due to the $113 million impairment charge recognized in 2006, compared to the $41 million impairment charge in 2007. The 2006 increase in consolidated operating income is due to increases for QVC ($209 million) and Starz Entertainment ($58 million), partially offset by losses generated by FUN ($140 million, including the above-described impairment charges) and Starz Media ($29 million) as well as an increase in corporate stock compensation expense of $34 million due to the adoption of Statement 123R. Our operating income in 2005 is attributable to QVC ($921 million) and Starz Entertainment ($105 million) partially offset by operating losses of our other consolidated subsidiaries and corporate expenses. F-12 Other Income and Expense Components of Other Income (Expense) are as follows: Years ended December 31, 2007 2006 2005 amounts in millions Interest expense Interactive Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capital Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (465) (176) (417) (263) (374) (252) Consolidated Liberty . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (641) (680) (626) Dividend and interest income Interactive Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capital Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 44 277 Consolidated Liberty . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 321 Share of earnings (losses) of affiliates Interactive Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capital Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Liberty . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ 77 (55) 22 40 174 214 47 44 91 35 108 143 9 4 13 Realized and unrealized gains (losses) on financial instruments, net Interactive Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capital Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (6) 1,275 20 (299) (17) 274 Consolidated Liberty . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,269 (279) 257 Gains (losses) on dispositions, net Interactive Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capital Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12 634 Consolidated Liberty . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 646 — 607 607 40 (401) (361) Other than temporary declines in fair value of investments Interactive Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capital Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — (33) — (4) — (449) Consolidated Liberty . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (33) (4) (449) Other, net Interactive Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capital Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Liberty . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ 1 (2) (1) 23 (5) 18 (38) (1) (39) Interest expense. Consolidated interest expense decreased 5.7% and increased 8.6% for the years ended December 31, 2007 and 2006, respectively, as compared to the corresponding prior year. Interest expense for the Interactive Group increased 11.5% in 2007, as compared to 2006, due to increased borrowings which were used to repurchase shares of Liberty Interactive common stock. Interest expense for the Capital Group decreased 33.1% in 2007 primarily due to our adoption of Statement of Financial Accounting Standards No. 155 (‘‘Statement 155’’) on January 1, 2007. Statement 155 permits fair value remeasurement of hybrid financial instruments that contain an embedded derivative (such as our senior exchangeable debentures) that would otherwise require bifurcation. We previously reported the fair value of the call option feature of our senior exchangeable debentures separate from the F-13 long-term debt, and the long-term debt was accreted to its face amount through interest expense. Our 2006 interest expense included $95 million of such accretion. Interest expense attributable to the Interactive Group increased 11.5% in 2006 due to increased borrowings by QVC, which were used to retire certain of our publicly-traded debt and for repurchases of Liberty Interactive common stock. Dividend and interest income. Interest income for the Capital Group increased in 2007 and 2006 due to higher invested cash balances. The Capital Group’s interest and dividend income for the year ended December 31, 2007 was comprised of interest income earned on invested cash ($164 million), dividends on News Corporation common stock ($57 million), dividends on other available-for-sale (‘‘AFS’’) securities ($17 million) and other ($39 million). As a result of the consummation of our exchange transaction with News Corporation described below, our dividend income from News Corporation will be zero in future years. Share of earnings of affiliates. Our 2007 share of earnings of affiliates for the Interactive Group is due primarily to Expedia, Inc. ($68 million), and our share of losses of affiliates for the Capital Group is due primarily to WildBlue Corporation ($54 million). Our 2006 share of earnings of affiliates are attributable to Expedia ($50 million) and other investees ($41 million). In February 2008, we completed an exchange transaction with News Corporation pursuant to which we exchanged our approximate 16% ownership interest in News Corporation for a subsidiary of News Corporation, which owns News Corporation’s approximate 41% interest in The DIRECTV Group, Inc., three regional sports television networks and approximately $465 million in cash. We will account for our interest in The DIRECTV Group using the equity method of accounting, which could result in a significant increase in our share of earnings of affiliates in future periods. In this regard, The DIRECTV Group reported net income for the year ended December 31, 2007 of $1,451 million. Realized and unrealized gains (losses) on financial instruments. Realized and unrealized gains (losses) on financial instruments are comprised of changes in the fair value of the following: Senior exchangeable debentures . . . . . . . . . . . . . . . . . . . . . . Equity collars . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Borrowed shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exchangeable debenture call option obligations . . . . . . . . . . . Other derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Years ended December 31, 2007 2006 2005 amounts in millions — $ 541 (59) 527 298 (32) — (353) 165 (97) — 311 (205) 172 (21) $1,269 (279) 257 F-14 Gains (losses) on dispositions. Aggregate gains (losses) from dispositions are comprised of the following. Transaction Capital Group Time Warner Exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CBS Exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sale of investment in Court TV . . . . . . . . . . . . . . . . . . . . . . . . Sale of investment in Freescale . . . . . . . . . . . . . . . . . . . . . . . . . Sale of investment in Telewest Global, Inc. . . . . . . . . . . . . . . . . Sale of investment in Cablevisi´on S.A. . . . . . . . . . . . . . . . . . . . Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interactive Group Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Years ended December 31, 2007 2006 2005 amounts in millions — $582 — — 31 — — — 303 — 256 — — — (266) — — (188) 53 48 21 634 607 (401) 12 — 40 $646 607 (361) In the above 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 7 and 17 to the accompanying consolidated financial statements for a discussion of the foregoing transactions. Other than temporary declines in fair value of investments. During 2007, 2006 and 2005, 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 date each adjustment was deemed necessary. These adjustments are reflected as other than temporary declines in fair value of investments in our consolidated statements of operations. Income taxes. Our effective tax rate was 14.0% in 2007, 26.2% in 2006 and 74.6% in 2005. The Time Warner Exchange and the CBS Exchange, which were completed in 2007, qualify as IRC Section 355 transactions, and therefore do not trigger federal or state income tax obligations. In addition, upon consummation of the exchange transactions, deferred tax liabilities previously recorded for the difference between our book and tax bases in our Time Warner and CBS Corporation investments in the amount of $354 million were reversed with an offset to income tax benefit. Our 2006 rate is less than the U.S. federal income tax rate of 35% due, in part, to a deferred tax benefit we recognized when we decided to effect a restructuring transaction which was effective on April 1, 2006, and which enabled us to include TruePosition in our Federal consolidated tax group on a prospective basis. As a result of this decision and considering our overall tax position, we reversed $89 million of valuation allowance recorded against TruePosition’s net deferred tax assets into our statement of operations as a deferred tax benefit in 2006. This valuation allowance did not relate to net operating loss carryforwards or some other future tax deduction of TruePosition, but rather related to temporary differences caused by revenue and cost amounts that were recognized for tax purposes in prior periods, but have been deferred for financial reporting purposes until future periods. In addition, we recorded deferred tax benefits of $105 million for changes in our estimated foreign tax rate based on our projections of our ability to use foreign tax credits in the future and $25 million for changes in our estimated state tax rate used to calculate our deferred tax liabilities. These benefits were partially offset by current tax expense of $43 million on the gain on sale of Court TV for which we had higher F-15 book basis than tax basis and $39 million for impairment of goodwill that is not deductible for tax purposes. In addition, we recorded state ($34 million) and foreign ($20 million) tax expense. Our effective tax rate in 2005 was greater than the U.S. federal income tax rate of 35% primarily due to a tax benefit of $147 million that we recorded as a result of a change in our estimated effective state and foreign tax rates. In the third quarter of 2005, we assessed our weighted average state tax rate in connection with our spin off of Discovery Holding Company. As a result of this assessment, we decreased our state tax rate used in calculating the amount of our deferred tax liabilities and recognized a deferred income tax benefit of $131 million. Also in 2005, we reduced our estimated foreign tax rate related to QVC and recognized a tax benefit of $16 million. These tax benefits were partially offset by our foreign tax expense and an increase in our valuation allowance for deferred tax assets of subsidiaries that we do not consolidate for tax purposes. Historically, we have not made significant federal income tax payments due to our ability to use prior year net operating (‘‘NOL’’) and capital losses carryforwards to offset current year taxable income. However, as a result of our February 2008 settlement with the IRS related to interest deductions on our exchangeable debentures, our NOL carryforwards were eliminated and we had taxable income in 2006 and 2007. Consequently, we will make federal tax payments of approximately $152 million for the 2007 tax year during the first quarter of 2008. Based on current projections, we expect to remit federal tax payments for the 2008 tax year and beyond. Net earnings (loss). Our net earnings (loss) was $2,114 million, $840 million and ($33) million for the years ended December 31, 2007, 2006 and 2005, respectively, and was the result of the above- described fluctuations in our revenue and expenses. In addition, we recognized earnings from discontinued operations of $149 million, $220 million and $10 million for the years ended December 31, 2007, 2006 and 2005, respectively. Included in our 2006 earnings from discontinued operations are tax benefits of $236 million related to our excess outside tax basis in OPTV and AEG over our basis for financial reporting. Liquidity and Capital Resources While the Interactive Group and the Capital Group are not separate legal entities and the assets and liabilities attributed to each group remain assets and liabilities of our consolidated company, we manage the liquidity and financial resources of each group separately. Keeping in mind that assets of one group may be used to satisfy liabilities of the other group, the following discussion assumes, consistent with management expectations, that future liquidity needs of each group will be funded by the financial resources attributed to each respective group. The following are potential sources of liquidity for each group to the extent the identified asset or transaction has been attributed to such group: available cash balances, 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), proceeds from asset sales, monetization of our public investment portfolio (including derivatives), debt and equity issuances, and dividend and interest receipts. Interactive Group. During the year ended December 31, 2007, the Interactive Group’s primary uses of cash were the repurchase of outstanding Liberty Interactive common stock ($1,224 million), funding the acquisitions of Backcountry ($120 million) and Bodybuilding ($116 million), capital expenditures ($289 million), tax payments to the Capital Group ($321 million) and debt repayments ($332 million). Since the issuance of our tracking stocks, our board of directors has authorized a share repurchase program pursuant to which we can repurchase up to $3 billion of outstanding shares of Liberty Interactive common stock in the open market or in privately negotiated transactions, from time to time, subject to market conditions. During the year ended December 31, 2007, we repurchased 36.9 million shares of Liberty Interactive Series A common stock in the open market for aggregate cash F-16 consideration of $740 million. In addition, in June 2007, we completed a tender offer pursuant to which we accepted for purchase 19.42 million shares of Series A Liberty Interactive common stock at a price of $24.95 per share, or aggregate cash consideration of $484 million. Cumulatively, we have repurchased an aggregate of $2,178 million of Liberty Interactive common stock pursuant to our stock repurchase program. We may alter or terminate the stock repurchase program at any time. The Interactive Group’s uses of cash in 2007 were primarily funded with cash from operations and borrowings under QVC’s credit facilities. As of December 31, 2007, the Interactive Group had a cash balance of $557 million. The projected uses of Interactive Group cash for 2008 include approximately $465 million for interest payments on QVC debt and parent debt attributed to the Interactive Group, $340 million for the purchase of additional shares of IAC, which we completed in January 2008, $210 million for capital expenditures, additional tax payments to the Capital Group and additional repurchases of Liberty Interactive common stock. In addition, we may make additional investments in existing or new businesses and attribute such investments to the Interactive Group. However, we do not have any commitments to make new investments at this time. As of December 31, 2007, the aggregate commitments under the QVC credit agreements were $5.25 billion, and outstanding borrowings aggregated $4.023 billion, which borrowings were increased to fund the purchase of additional shares of IAC noted above. QVC’s ability to borrow the unused capacity is dependent on its continuing compliance with the covenants contained in the agreements at the time of, and after giving effect to, a requested borrowing. Capital Group. During the year ended December 31, 2007, the Capital Group’s primary uses of cash were the repurchase of Series A Liberty Capital common stock as described below ($1,305 million) and debt repayments ($166 million). In connection with the issuance of our tracking stocks, our board of directors authorized a share repurchase program pursuant to which we could repurchase up to $1 billion of outstanding shares of Liberty Capital common stock in the open market or in privately negotiated transactions, from time to time, subject to market conditions. That amount was increased to approximately $1.3 billion in connection with a tender offer for Liberty Capital stock described below. In May 2007, our board of directors authorized the repurchase of an additional $1 billion of Liberty Capital common stock. We may alter or terminate the program at any time. In order to implement our share repurchase program for Liberty Capital common stock, we completed a tender offer on April 5, 2007, pursuant to which we accepted for purchase 11.54 million shares of Series A Liberty Capital common stock at a price of $113.00 per share or aggregate cash consideration of $1,305 million (including transaction costs). We funded the cash consideration with available cash on hand. The Capital Group’s sources of liquidity for the year ended December 31, 2007 include cash from the Time Warner Exchange ($984 million) and the CBS Exchange ($170 million), cash proceeds from the sale of AEG ($332 million) and OPTV ($112 million), tax payments from the Interactive Group ($321 million) and available cash on hand. In addition, in April 2007, we borrowed $750 million of bank financing with an interest rate of LIBOR plus an applicable margin. Such funds are not available for general corporate purposes. We intend to invest such proceeds in a portfolio of selected debt and mezzanine-level instruments of companies in the telecommunications, media and technology sectors that we believe have favorable risk/return profiles. Although no assurance can be given, we expect to make such investments over the next 18-24 months. See note 8 to the accompanying consolidated financial statements for a discussion of the Investment Fund to which this bank facility relates. F-17 The projected uses of Capital Group cash for 2008 include approximately $180 million by Starz Media for the acquisition and production of films and television productions, approximately $155 million for interest payments on debt attributed to the Capital Group and $152 million for federal tax payments for our 2007 tax year. We may also make additional investments in existing or new businesses and attribute such investments to the Capital Group. However, we do not have any commitments to make new investments at this time. In addition, we expect to generate taxable income in 2008 and beyond and that we will make related federal tax payments. In addition to the foregoing expected uses of cash, the holders of our 0.75% Senior Exchangeable Debentures due 2023, which have an aggregate principal amount of approximately $1.75 billion, have the right to put such debentures to us at 100% of par during the period from February 25, 2008 to March 24, 2008 for payment on March 31, 2008. We have notified our bondholders that we will pay cash for any debentures that are validly tendered pursuant to the put right. We intend to fund the cash purchase price with committed funds obtained from financing involving certain of our equity derivatives, as further described below. If the reclassification approved by our stockholders on October 23, 2007 is implemented, the Liberty Entertainment common stock would be intended to track and reflect the separate economic performance of a newly designated Entertainment Group, which would initially have attributed to it a portion of the businesses, assets and liabilities that are currently attributed to the Capital Group, including our subsidiaries Starz Entertainment and FUN, our equity interests in GSN, LLC and WildBlue Communications, Inc. and approximately $500 million of cash and $551 million principal amount (as of December 31, 2007) of our publicly-traded debt. In addition, we would attribute to the Entertainment Group all of the businesses and assets received in the News Corporation Exchange. We expect that the Capital Group’s investing and financing activities will be funded with a combination of cash on hand, cash provided by operating activities, tax payments from the Interactive Group, proceeds from collar expirations and dispositions of non-strategic assets. At December 31, 2007, the Capital Group’s sources of liquidity include $2,578 million in cash and cash equivalents and $4,979 million of non-strategic AFS securities including related derivatives. To the extent the Capital Group recognizes any taxable gains from the sale of assets or the expiration of derivative instruments, we may incur current tax expense and be required to make tax payments, thereby reducing any cash proceeds attributable to the Capital Group. Our derivatives (‘‘AFS Derivatives’’) related to certain of our AFS investments provide the Capital Group with an additional source of liquidity. Based on the put price and assuming we deliver owned or borrowed shares to settle each of the AFS Derivatives as they mature and excluding any provision for income taxes, the Capital Group would have attributed to it cash proceeds of approximately $21 million in 2008, $1,223 million in 2009, $1,674 million in 2010 and $446 million in 2011 upon settlement of its AFS Derivatives. Prior to the maturity of our equity derivatives, the terms of certain of the equity derivatives allow borrowings against the future put option proceeds at LIBOR or LIBOR plus an applicable spread, as the case may be. As of December 31, 2007, such borrowing capacity aggregated approximately $3,364 million. Such borrowings would reduce the cash proceeds upon settlement noted in the preceding paragraph. Upon completion of our exchange transaction with News Corporation in February 2008, such borrowing capacity was reduced by $916 million. F-18 Off-Balance Sheet Arrangements and Aggregate Contractual Obligations Capital Group The following contingencies and obligations have been attributed to the Capital Group: Starz Entertainment has entered into agreements with a number of motion picture producers which obligate Starz Entertainment to pay fees (‘‘Programming Fees’’) for the rights to exhibit certain films that are released by these producers. The unpaid balance under agreements for film rights related to films that were available for exhibition by Starz Entertainment at December 31, 2007 is reflected as a liability in the accompanying consolidated balance sheet. The balance due as of December 31, 2007 is payable as follows: $99 million in 2008; $13 million in 2009; and $6 million thereafter. Starz Entertainment has also contracted to pay Programming Fees for the rights to exhibit films that have been released theatrically, but are not available for exhibition by Starz Entertainment until some future date. These amounts have not been accrued at December 31, 2007. Starz Entertainment’s estimate of amounts payable under these agreements is as follows: $482 million in 2008; $158 million in 2009; $102 million in 2010; $101 million in 2011; $94 million in 2012 and $178 million thereafter. In addition, Starz Entertainment is obligated to pay Programming Fees for all qualifying films that are released theatrically in the United States by studios owned by The Walt Disney Company through 2012 and all qualifying films that are released theatrically in the United States by studios owned by Sony Pictures Entertainment (‘‘Sony’’) through 2013. Films are generally available to Starz Entertainment for exhibition 10 - 12 months after their theatrical release. The Programming Fees to be paid by Starz Entertainment are based on the quantity and domestic theatrical exhibition receipts of qualifying films. As these films have not yet been released in theatres, Starz Entertainment is unable to estimate the amounts to be paid under these output agreements. However, such amounts are expected to be significant. In connection with an option exercised by Sony to extend the Sony contract through 2013, Starz Entertainment has agreed to pay Sony a total of $190 million in four annual installments of $47.5 million beginning in 2011. Starz Entertainment’s payments to Sony will be amortized ratably over the three-year period beginning in 2012. Liberty guarantees Starz Entertainment’s film licensing obligations under certain of its studio output agreements. At December 31, 2007, Liberty’s guarantees for studio output obligations for films released by such date aggregated $793 million. While the guarantee amount for films not yet released is not determinable, such amount is expected to be significant. As noted above, Starz Entertainment has recognized the liability for a portion of its obligations under the output agreements. As this represents a commitment of Starz Entertainment, a consolidated subsidiary of ours, we have not recorded a separate liability for our guarantees of these obligations. Capital Group and Interactive Group 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. F-19 We have contingent liabilities related to legal and tax proceedings and other matters arising in the ordinary course of business. Although it is reasonably possible we may incur losses upon conclusion of such matters, an estimate of any loss or range of loss cannot be made. In the opinion of management, it is expected that amounts, if any, which may be required to satisfy such contingencies will not be material in relation to the accompanying consolidated financial statements. Information concerning the amount and timing of required payments, both accrued and off-balance sheet, under our contractual obligations at December 31, 2007 is summarized below: Payments due by period Total Less than 1 year 1-3 years 4-5 years After 5 years amounts in millions Attributed Capital Group contractual obligations Long-term debt(1) . . . . . . . . . . . . . . . . . . . . . . . . . . Interest payments(2) . . . . . . . . . . . . . . . . . . . . . . . . . Long-term financial instruments . . . . . . . . . . . . . . . . Operating lease obligations . . . . . . . . . . . . . . . . . . . . Programming Fees(3) . . . . . . . . . . . . . . . . . . . . . . . . Purchase orders and other obligations . . . . . . . . . . . . $ 5,329 2,477 1,280 91 1,233 224 Total Capital Group . . . . . . . . . . . . . . . . . . . . . . . 10,634 Attributed Interactive Group contractual obligations Long-term debt(1) . . . . . . . . . . . . . . . . . . . . . . . . . . Interest payments(2) . . . . . . . . . . . . . . . . . . . . . . . . . Long-term financial instruments . . . . . . . . . . . . . . . . Operating lease obligations . . . . . . . . . . . . . . . . . . . . Purchase orders and other obligations . . . . . . . . . . . . 7,192 3,682 79 79 1,072 Total Interactive Group . . . . . . . . . . . . . . . . . . . . . 12,104 Consolidated contractual obligations Long-term debt(1) . . . . . . . . . . . . . . . . . . . . . . . . . . Interest payments(2) . . . . . . . . . . . . . . . . . . . . . . . . . Long-term financial instruments . . . . . . . . . . . . . . . . Operating lease obligations . . . . . . . . . . . . . . . . . . . . Programming Fees(3) . . . . . . . . . . . . . . . . . . . . . . . . Purchase orders and other obligations . . . . . . . . . . . . 12,521 6,159 1,359 170 1,233 1,296 Total consolidated . . . . . . . . . . . . . . . . . . . . . . . . . $22,738 39 155 1,183 14 581 224 2,196 13 465 — 23 1,072 1,573 52 620 1,183 37 581 1,296 3,769 15 296 33 25 279 — 648 928 830 — 36 — 1,794 943 1,126 33 61 279 — 2,442 776 258 64 18 195 — 1,311 4,034 388 79 16 — 4,517 4,810 646 143 34 195 — 5,828 4,499 1,768 — 34 178 — 6,479 2,217 1,999 — 4 — 4,220 6,716 3,767 — 38 178 — 10,699 (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) have elements which are reported at fair value in our consolidated balance sheet. Also includes capital lease obligations. Amounts do not assume additional borrowings or refinancings of existing debt. (2) Amounts (i) are based on our outstanding debt at December 31, 2007, (ii) assume the interest rates on our floating rate debt remain constant at the December 31, 2007 rates and (iii) assume that our existing debt is repaid at maturity. F-20 (3) Does not include Programming Fees for films not yet released theatrically, as such amounts cannot be estimated. Recent Accounting Pronouncements In September 2006, the Financial Accounting Standards Board (‘‘FASB’’) issued Statement of Financial Accounting Standards No. 157, ‘‘Fair Value Measurements’’ (‘‘Statement 157’’), which defines fair value, establishes a framework for measuring fair value under GAAP and expands disclosures about fair value measurements. Statement 157 applies to other accounting pronouncements that require or permit fair value measurements. The new guidance is effective for financial statements issued for fiscal years beginning after November 15, 2007, and for interim periods within those fiscal years. We do not expect that our adoption of Statement 157 will have a significant impact on the reported amounts of our assets and liabilities that we report at fair value in our consolidated balance sheet. In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, ‘‘The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115’’ (‘‘Statement 159’’). Statement 159 permits entities to choose to measure many financial instruments, such as available-for-sale securities, and certain other items at fair value and to recognize the changes in fair value of such instruments in the entity’s statement of operations. Currently under Statement of Financial Accounting Standards No. 115, entities are required to recognize changes in fair value of available-for-sale securities in the balance sheet in accumulated other comprehensive earnings. Statement 159 is effective as of the beginning of an entity’s fiscal year that begins after November 15, 2007. Effective January 1, 2008, we plan to apply the provisions of Statement 159 to certain of our available-for-sale securities which we consider non-strategic. As a result, changes in the fair value of the subject securities will be reported in unrealized gains/losses in our consolidated statement of operations, rather than as a component of accumulated other comprehensive earnings in our consolidated balance sheet. The fair value of such securities was $4,839 million at December 31, 2007, and the amount of unrealized gains included in other comprehensive earnings that will be included in our cumulative effect of accounting change and reclassified to retained earnings upon adoption of Statement 159 is $1,039 million. In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised 2007), ‘‘Business Combinations’’ (‘‘Statement 141R’’). Statement 141R replaces Statement of Financial Accounting Standards No. 141, ‘‘Business Combinations’’ (‘‘Statement 141’’), although it retains the fundamental requirement in Statement 141 that the acquisition method of accounting be used for all business combinations. Statement 141R establishes principles and requirements for how the acquirer in a business combination (a) recognizes and measures the assets acquired, liabilities assumed and any noncontrolling interest in the acquiree, (b) recognizes and measures the goodwill acquired in a business combination or a gain from a bargain purchase and (c) determines what information to disclose regarding the business combination. Statement 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first fiscal year after December 15, 2008. In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, ‘‘Noncontrolling Interests in Consolidated Financial Statements’’ (‘‘Statement 160’’). Statement 160 establishes accounting and reporting standards for the noncontrolling interest in a subsidiary, commonly referred to as minority interest. Among other matters, Statement 160 requires (a) the noncontrolling interest be reported within equity in the balance sheet and (b) the amount of consolidated net income attributable to the parent and to the noncontrolling interest to be clearly presented in the statement of income. Statement 160 is effective for fiscal years beginning after December 15, 2008. Statement 160 is to be applied prospectively, except for the presentation and disclosure requirements, which shall be applied retrospectively for all periods presented. We expect that our adoption of Statement 160 in 2009 will impact the accounting for purchases and sales and the presentation of the noncontrolling interests in our subsidiaries. F-21 Critical Accounting Estimates The preparation of our financial statements in conformity with GAAP 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 estimates 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 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 a significant portion of our total assets at each of December 31, 2007 and 2006. We account for these investments pursuant to Statement of Financial Accounting Standards No. 115, Statement of Financial Accounting Standards No. 142, Accounting Principles Board Opinion No. 18, EITF Topic 03-1 and SAB No. 59. 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. If a decline in fair value is determined to be other than temporary, we are required to reflect such decline in our consolidated statement of operations. Other than temporary declines in fair value of our cost investments are recognized on a separate line in our consolidated statement of operations, and other than temporary declines in fair value of our equity method investments are included in share of losses of affiliates in our consolidated statement of operations. The primary factors we consider in our determination of whether declines in fair value are other than temporary 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 prices of the investments 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 and the timing of when to recognize such charges 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 made 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 consolidated statement of operations in the period in which they occur to the extent such decreases are deemed to be other than temporary. Subsequent increases in fair value will be recognized in our consolidated statement of operations only upon our ultimate disposition of the investment. At December 31, 2007, we had unrealized holding losses of $12 million related to certain of our available-for-sale debt securities. In connection with our adoption of Statement 159 on January 1, 2008, all changes in fair value of the investments to which we apply the provisions of Statement 159 will be recognized in our consolidated statements of operations. F-22 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, 2007 and 2006. 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. We may need to make estimates of future cash flows and discount rates as 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. Retail Related Adjustments and Allowances. QVC records adjustments and allowances for sales returns, inventory obsolescence and uncollectible receivables. Each of these adjustments is estimated based on historical experience. Sales returns are calculated as a percent of sales and are netted against revenue in our consolidated statement of operations. For the years ended December 31, 2007, 2006 and 2005, sales returns represented 18.7%, 18.5% and 18.0% of QVC’s gross product revenue, respectively. The inventory obsolescence reserve is calculated as a percent of QVC’s inventory at the end of a reporting period based on among other factors, the age of the inventory and historical experience with liquidated inventory. The change in the reserve is included in cost of goods sold in our consolidated statements of operations. At December 31, 2007, QVC’s inventory is $1,020 million and the obsolescence adjustment is $105 million. QVC’s allowance for doubtful accounts is calculated as a percent of accounts receivable at the end of a reporting period, and the change in such allowance is recorded as bad debt expense in our consolidated statements of operations. At December 31, 2007, QVC’s trade accounts receivable are $1,173 million, net of the allowance for doubtful accounts of $56 million. Each of these adjustments requires management judgment and may not reflect actual results. Income Taxes. We are required to estimate the amount of tax payable or refundable for the current year and the deferred income tax liabilities and assets for the future tax consequences of events that have been reflected in our financial statements or tax returns for each taxing jurisdiction in which we operate. This process requires our management to make judgments regarding the timing and probability of the ultimate tax impact of the various agreements and transactions that we enter into. Based on these judgments we may record tax reserves or adjustments to valuation allowances on deferred tax assets to reflect the expected realizability of future tax benefits. Actual income taxes could vary from these estimates due to future changes in income tax law, significant changes in the jurisdictions in which we operate, our inability to generate sufficient future taxable income or unpredicted results from the final determination of each year’s liability by taxing authorities. These changes could have a significant impact on our financial position. Interactive Group On May 9, 2006, our stockholders approved our corporate restructuring which, among other things, resulted in the creation of two tracking stocks, one of which is intended to reflect the separate performance of the Interactive Group. The Interactive Group consists of our subsidiaries QVC, Provide, BuySeasons, Backcountry.com and Bodybuilding.com, our interests in IAC/InterActiveCorp and Expedia and $3,108 million principal amount (as of December 31, 2007) of our publicly-traded debt. F-23 The reclassification approved by our shareholders in October 2007, if implemented, will not affect the assets attributed to the Interactive Group. The following discussion and analysis provides information concerning the results of operations and financial condition of the Interactive Group. Although our restructuring was not completed until May 9, 2006, the following discussion is presented as though the restructuring had been completed on January 1, 2005. The results of operations of Provide, BuySeasons and Backcountry.com are included in e-commerce businesses since their respective date of acquisition in the tables below. Fluctuations in e-commerce businesses from 2005 to 2006 to 2007 are due primarily to the acquisitions of Provide and BuySeasons in 2006 and Backcountry.com in 2007. Bodybuilding.com was acquired on December 31, 2007, and therefore, did not impact our 2007 results of operations. This discussion should be read in conjunction with (1) our consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K and (2) the Unaudited Attributed Financial Information for Tracking Stock Groups filed as Exhibit 99.1 to this Annual Report on Form 10-K. Results of Operations Years ended December 31, 2007 2006 2005 amounts in millions Revenue QVC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . e-commerce businesses . . . . . . . . . . . . . . . . . . . . . . . . . . Corporate and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . $7,397 405 — 7,074 252 — 6,501 — — $7,802 7,326 6,501 Operating Cash Flow (Deficit) QVC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . e-commerce businesses . . . . . . . . . . . . . . . . . . . . . . . . . . Corporate and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,652 40 (8) 1,656 30 (6) 1,422 — (5) $1,684 1,680 1,417 Operating Income (Loss) QVC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . e-commerce businesses . . . . . . . . . . . . . . . . . . . . . . . . . . Corporate and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,114 16 (17) 1,130 14 (14) $1,113 1,130 921 — (5) 916 QVC. QVC is a retailer of a wide range of consumer products, which are marketed and sold primarily by merchandise-focused televised shopping programs and via the Internet. In the United States, QVC’s live programming is aired through its nationally televised shopping network 24 hours a day (‘‘QVC-US’’). Internationally, QVC’s program services are based in the United Kingdom (‘‘QVC-UK’’), Germany (‘‘QVC-Germany’’) and Japan (‘‘QVC-Japan’’). QVC-UK broadcasts 24 hours a day with 17 hours of live programming, and QVC-Germany and QVC-Japan each broadcast live 24 hours a day. F-24 QVC’s operating results are as follows: Years ended December 31, 2007 2006 2005 Net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . SG&A expenses (excluding stock-based compensation) . . . Operating cash flow . . . . . . . . . . . . . . . . . . . . . . . . . . Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . Depreciation and amortization . . . . . . . . . . . . . . . . . . . . amounts in millions 7,074 (4,426) $ 7,397 (4,682) 6,501 (4,112) 2,715 (616) (447) 1,652 (22) (516) 2,648 (579) (413) 1,656 (50) (476) 2,389 (570) (397) 1,422 (52) (449) Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,114 1,130 921 Net revenue is generated in the following geographical areas: Years ended December 31, 2007 2006 2005 QVC-US . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . QVC-UK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . QVC-Germany . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . QVC-Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . amounts in millions 4,983 612 848 631 $5,208 707 870 612 4,640 554 781 526 $7,397 7,074 6,501 QVC’s net revenue increased 4.6% and 8.8% for the years ended December 31, 2007 and 2006, respectively, as compared to the corresponding prior year. The 2007 increase in revenue is comprised of $101 million related to a 1.3% increase in the number of units shipped from 165.7 million to 167.8 million, $125 million due to a 1.6% increase in the average sales price per unit (‘‘ASP’’) and a $122 million increase due to favorable foreign currency rates. These increases were partially offset by a net decrease of $25 million primarily due to an increase in estimated product returns. Returns as a percent of gross product revenue increased from 18.5% in 2006 to 18.7% in 2007. The 2006 increase in revenue is comprised of $582 million due to a 7.3% increase in the number of units shipped from 154.4 million to 165.7 million and $88 million related to a 2.0% increase in the ASP. The revenue increases were partially offset by an $11 million decrease due to unfavorable foreign currency rates and an $86 million decrease due primarily to an increase in estimated product returns. Returns as a percent of gross product revenue increased from 18.0% in 2005 to 18.5% in 2006 due to a continued shift in the mix from home products to apparel and accessories products, which typically have higher return rates. As noted above, during the years ended December 31, 2007 and 2006, the changes in revenue and expenses were also impacted by changes in the exchange rates for the UK pound sterling, the euro and the Japanese yen. In the event the U.S. dollar strengthens against these foreign currencies in the F-25 future, QVC’s revenue and operating cash flow will be negatively impacted. The percentage increase in revenue for each of QVC’s geographic areas in dollars and in local currency is as follows: Percentage increase (decrease) in net revenue Year ended December 31, 2007 Year ended December 31, 2006 U.S. dollars Local currency U.S. dollars Local currency QVC-US . . . . . . . . . . . . . . . . . QVC-UK . . . . . . . . . . . . . . . . . QVC-Germany . . . . . . . . . . . . . QVC-Japan . . . . . . . . . . . . . . . 4.5% 15.5% 2.6% (3.0)% 4.5% 6.5% (5.9)% (2.0)% 7.4% 10.5% 8.6% 20.0% 7.4% 8.4% 7.1% 26.1% Revenue for QVC-US was negatively impacted in 2007 by a slow retail environment and weakness in the gold jewelry category due to higher gold prices. QVC-Germany net revenue in local currency declined during the year ended December 31, 2007 relative to the prior year due to increased competition, a soft retail market, a 300 basis point increase in the German value added tax (VAT) rate and higher usage of markdowns in the fashion category. QVC-Japan net revenue declined in local currency during the year ended December 31, 2007, as compared to the prior year, due to the heightened regulatory focus on health and beauty product presentations beginning in March 2007, which caused QVC-Japan to remove a number of products from its programming. The number of homes receiving QVC’s services are as follows: Homes (in millions) December 31, 2007 2006 2005 QVC-US . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . QVC-UK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . QVC-Germany . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . QVC-Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93.4 21.8 37.6 21.1 90.7 19.4 37.5 18.7 90.0 17.8 37.4 16.7 The QVC service is already received by substantially all of the cable television and direct broadcast satellite homes in the U.S. and Germany. In addition, the rate of growth in households is expected to diminish in the UK and Japan. Therefore, future sales growth will primarily depend on continued additions of new customers from homes already receiving the QVC service and continued growth in sales to existing customers. QVC’s future sales may also be affected by (i) the willingness of cable and satellite distributors to continue carrying QVC’s programming service, (ii) QVC’s ability to maintain favorable channel positioning, which may become more difficult as distributors convert analog customers to digital, (iii) changes in television viewing habits because of personal video recorders, video-on-demand and IP television and (iv) general economic conditions. QVC’s gross profit percentage was 36.7%, 37.4% and 36.7% for the years ended December 31, 2007, 2006 and 2005, respectively. The decrease in gross profit percentage in 2007 is due primarily to higher distribution costs and to a lesser extent, a higher obsolescence provision. The higher distribution costs resulted from increases in shipping rates and costs associated with new distribution centers in the U.S. and Japan for which economies of scale have not yet been achieved. The increase in the gross profit percentage in 2006 was due to higher initial margins due to a shift in the sales mix from home products to higher margin apparel and accessories products and to a lower inventory obsolescence provision. QVC’s operating expenses are comprised of commissions and license fees, order processing and customer service expense, credit card processing fees, telecommunications expense and bad debt expense. Operating expenses increased 6.4% and 1.6% for the years ended December 31, 2007 and F-26 2006, respectively, as compared to the corresponding prior year period. These increases are primarily due to increases in sales volume. As a percentage of net revenue, operating expenses were 8.3%, 8.2% and 8.8% for 2007, 2006 and 2005, respectively. The 2007 increase in operating expenses as a percent of revenue is due primarily to an increase in bad debt expense due to higher write-offs related to QVC’s installment receivables and private label credit card. Operating expenses increased at a lower rate than sales in 2006 due primarily to commissions and bad debt expense. Commissions, as a percent of net revenue decreased in 2006, as compared to 2005. The decrease in 2006 is due to a greater percentage of Internet sales for which lower commissions are required to be paid. In addition, commissions decreased as a percentage of revenue in QVC-Japan where certain distributors are paid the greater of (i) a fixed fee per subscriber and (ii) a specified percentage of sales. In 2006, more distributors started to receive payments based on sales volume rather than a fixed fee per subscriber. QVC’s bad debt provision decreased as a percent of net revenue in 2006 due to lower write-offs on QVC’s private label credit card. As a percent of net revenue, order processing and customer service expenses remained constant in 2006. QVC’s telecommunications expenses as a percent of revenue remained consistent in 2006. Credit card processing fees remained consistent as a percent of net revenue for each of the years ended December 31, 2007, 2006 and 2005. QVC’s SG&A expenses include personnel, information technology, marketing and advertising expenses. Such expenses increased 8.2% and 4.0% during the years ended December 31, 2007 and 2006, respectively, as compared to the corresponding prior year. The 2007 increase is due primarily to (i) an $11 million increase in marketing and advertising expense related to QVC’s new branding campaign and other marketing initiatives, (ii) an $8 million increase in franchise taxes driven by the Company’s settlement of certain franchise tax audit issues in 2006 which caused a $15 million reversal of franchise tax reserves in the prior year, (iii) a $5 million accrual for a legal settlement and (iv) a $5 million net increase in personnel expenses due to merit and headcount increases offset by decreased management bonus compensation. Due to the fixed cost and discretionary nature of many of these expenses, SG&A expenses increased at a lower rate than revenue in 2006. In addition, QVC settled certain franchise tax audit issues and reversed $15 million of reserves recorded in prior years. QVC’s depreciation and amortization expense increased for the years ended December 31, 2007 and 2006. Such increases are due to fixed asset and software additions. Capital Group Our other tracking stock is intended to reflect the separate performance of the Capital Group. The Capital Group is comprised of our subsidiaries and assets not attributed to the Interactive Group, including controlling interests in Starz Entertainment, Starz Media, ANLBC, FUN, TruePosition, Leisure Arts and WFRV TV Station, as well as minority investments in News Corporation, Time Warner Inc., Sprint Nextel Corporation and other public and private companies. In addition, we have attributed $4,481 million principal amount (as of December 31, 2007) of our senior exchangeable debentures and $750 million of our bank debt to the Capital Group. The reclassification approved by our shareholders in October 2007, if implemented, will result in a portion of the assets currently attributed to the Capital Group being attributed to a new Entertainment Group. The following discussion and analysis provides information concerning the attributed results of operations and financial condition of the Capital Group. Although our restructuring was not completed until May 9, 2006, the following discussion is presented as though the restructuring had been completed on January 1, 2005. This discussion should be read in conjunction with (1) our consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K and (2) the Unaudited Attributed Financial Information for Tracking Stock Groups filed as Exhibit 99.1 to this Annual Report on Form 10-K. F-27 Results of Operations Revenue Starz Entertainment . . . . . . . . . . . . . . . . . . . . . . . . . . . . Starz Media . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Corporate and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,066 254 301 1,033 86 168 1,004 — 141 Years ended December 31, 2007 2006 2005 amounts in millions Operating Cash Flow (Deficit) Starz Entertainment . . . . . . . . . . . . . . . . . . . . . . . . . . . . Starz Media . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Corporate and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating Income (Loss) Starz Entertainment . . . . . . . . . . . . . . . . . . . . . . . . . . . . Starz Media . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Corporate and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,621 1,287 1,145 $ 264 (143) (76) $ 45 186 (24) (59) 103 $ 210 (342) (243) 163 (29) (243) $ (375) (109) 171 — (47) 124 105 — (77) 28 Revenue. The Capital Group’s combined revenue increased 26.0% and 12.4% for the years ended December 31, 2007 and 2006, respectively, as compared to the corresponding prior year. The 2007 increase in corporate and other revenue is due primarily to a full year of revenue for Starz Media, which increased $168 million, and our acquisition of ANLBC, which generated $159 million of revenue. These increases were partially offset by an $88 million decrease for TruePosition as further described below. The 2006 increase in combined revenue is due to Starz Entertainment, as well as our acquisitions of Starz Media and FUN, which contributed $86 million and $42 million of revenue, respectively, in 2006. In November 2006, TruePosition signed an amendment to its existing services contract with AT&T Corp. (formerly Cingular Wireless) that requires TruePosition to develop and deliver additional software features. Because TruePosition does not have vendor specific objective evidence related to the value of these additional features, TruePosition is required to defer revenue recognition until all of the features have been delivered. TruePosition currently estimates that these features will be delivered at the end of 2008. Accordingly, absent any further contractual changes, TruePosition will not recognize any significant revenue under this contract until the first quarter of 2009. TruePosition recognized approximately $105 million of revenue under this contract in 2006 prior to signing the amendment. TruePosition’s services contract with its other major customer, T-Mobile, Inc., has a similar provision which prevents TruePosition from recognizing revenue. Such contract expires in June 2008, but contains provisions allowing T-Mobile to extend. It should be noted that both AT&T and T-Mobile are paying currently for services they receive and that the aforementioned deferrals have normal gross profit margins included. Operating cash flow. The Capital Group’s Operating Cash Flow decreased $58 million or 56.3% and $21 million or 16.9% in 2007 and 2006, respectively, as compared to the corresponding prior year. In 2007, operating cash flow deficits for Starz Media and TruePosition increased $119 million and $75 million, respectively, as compared to 2006. These operating cash flow decreases were partially offset by increases for Starz Entertainment and ANLBC of $78 million and $38 million, respectively. We acquired ANLBC in May 2007, and therefore, did not own it during the first quarter of the year when F-28 ANLBC operates at a loss as no revenue is earned during this period. ANLBC’s full year 2007 operating cash flow was approximately $23 million. Starz Media’s operating cash flow deficit resulted from (i) the $79 million write-off of capitalized production costs due to the abandonment of certain films and downward adjustments to the revenue projections for certain TV series and other films, (ii) start up costs for Overture Films and the delay of film release dates into 2008 and (iii) lower than expected revenue for Anchor Bay, its DVD distribution division. We currently expect Starz Media to continue incurring operating cash flow deficits and operating losses for the next two to three years. TruePosition’s operating cash flow deficit was due in large part to the deferral of revenue under its AT&T and T-Mobile contracts described above. The 2006 decrease in combined operating cash flow is due primarily to an operating cash flow deficit generated by Starz Media, as advertising costs for the animated film Everyone’s Hero exceeded the revenue it earned. The increase in operating cash flow for Starz Entertainment was partially offset by an operating cash flow deficit of $11 million for FUN. Impairment of long-lived assets. In connection with our 2007 annual evaluation of the recoverability of Starz Media’s goodwill, we estimated the fair value of Starz Media’s reporting units using a combination of discounted cash flows and market comparisons and concluded that the carrying value of certain reporting units exceeded their respective fair values. Accordingly, we recognized a $182 million impairment charge related to goodwill. During the third quarter of 2007, FUN recognized a $41 million impairment loss related to its sports information segment due to new competitors in the marketplace and the resulting loss of revenue and operating income. We acquired our interest in FUN in March 2006. Subsequent to our acquisition, the market value of FUN’s stock declined significantly due to the performance of certain of FUN’s subsidiaries and uncertainty surrounding government legislation of Internet gambling which we believe the market perceives as potentially impacting FUN’s skill gaming business. In connection with our 2006 annual evaluation of the recoverability of FUN’s goodwill, we estimated the fair value of FUN using a combination of discounted cash flows and market comparisons and concluded that the carrying value of FUN’s goodwill exceeded its market value. Accordingly, we recognized a $111 million impairment charge related to goodwill and a $2 million impairment charge related to trademarks. Operating income (loss). The Capital Group’s operating losses increased in 2007 and 2006. The 2007 increase is due primarily to increased operating losses of $313 million for Starz Media and $73 million for TruePosition. These losses were partially offset by improved operating results of $83 million for FUN and $47 million for Starz Entertainment. The improvement in FUN’s operating loss from $140 million to $57 million was due to the $113 million impairment charge recognized in 2006 compared to $41 million impairment charge in 2007. The improvement in operating income for Starz Entertainment in 2006 was more than offset by operating losses for Starz Media and FUN, as well as an increase in corporate stock compensation expense. Starz Entertainment. Starz Entertainment primarily provides premium programming distributed by cable operators, direct-to-home satellite providers and other distributors throughout the United States. Substantially all of Starz Entertainment’s revenue is derived from the delivery of movies to subscribers under affiliation agreements with television video programming distributors. Some of Starz Entertainment’s affiliation agreements provide for payments to Starz Entertainment based on the number of subscribers that receive Starz Entertainment’s services. Starz Entertainment also has fixed-rate affiliation agreements with certain of its customers. Pursuant to these agreements, the customers pay an agreed-upon rate regardless of the number of subscribers. The agreed-upon rate is contractually increased annually or semi-annually as the case may be, and these agreements, expire in 2008 through 2012. During the year ended December 31, 2007, 71% of Starz Entertainment’s revenue was generated by its four largest customers, Comcast, Echostar Communications, DIRECTV and Time Warner, each of which individually generated more than 10% of Starz Entertainment’s revenue for such period. Starz Entertainment’s affiliation agreement with DIRECTV expires in December 2008. In F-29 addition, the affiliation agreement with Time Warner has expired. Starz Entertainment is currently in negotiations with Time Warner regarding a new agreement. There can be no assurance that any new agreement with Time Warner will have economic terms comparable to the old agreement. Starz Entertainment’s operating results are as follows: Years ended December 31, 2007 2006 2005 Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SG&A expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . amounts in millions 1,033 (741) (106) $1,066 (689) (113) 1,004 (706) (127) Operating cash flow . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . 264 (33) (21) Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 210 186 3 (26) 163 171 (17) (49) 105 Starz Entertainment’s revenue increased 3.2% and 2.9% for the years ended December 31, 2007 and 2006, respectively, as compared to the corresponding prior year. During the third quarter of 2007, Starz Entertainment entered into a new affiliation agreement with DIRECTV which is retroactive to January 1, 2007 and extends through the end of 2008. The previous affiliation agreement with DIRECTV expired June 30, 2006. Since June 30, 2006, Starz Entertainment had recognized revenue from DIRECTV based on cash payments from DIRECTV which were at lower rates than required by the old affiliation agreement. The new affiliation agreement provides for rates that are higher than those paid by DIRECTV since June 30, 2006, but lower than the rates in the old affiliation agreement. Accordingly, in the third quarter of 2007, Starz Entertainment recognized $7 million of revenue related to 2006 based on the difference between the rates provided in the new affiliation agreement and the rates previously paid by DIRECTV. In addition to the retroactive impact of the new DirecTV affiliation agreement noted above, the 2007 increase in revenue is due to a $26 million increase resulting from growth in the average number of subscription units for Starz Entertainment’s services. The 2006 increase in revenue is due to a $56 million increase resulting from an increase in the average number of subscription units for Starz Entertainment’s services partially offset by a $27 million decrease due to a decrease in the effective rate for Starz Entertainment services. The Starz movie service and the Encore and Thematic Multiplex channels (‘‘EMP’’) movie service are the primary drivers of Starz Entertainment’s revenue. Starz average subscriptions increased 7.5% and 5.7% in 2007 and 2006, respectively; and EMP average subscriptions increased 8.8% and 6.6% in 2007 and 2006, respectively. The effects on revenue of these increases in subscriptions units are somewhat mitigated by the fixed-rate affiliation agreements that Starz Entertainment has entered into in recent years. In this regard, approximately 36% of Starz Entertainment’s revenue was earned under its fixed-rate affiliation agreements during the year ended December 31, 2007. At December 31, 2007, cable, direct broadcast satellite, and other distribution represented 68.3%, 28.7% and 3.0%, respectively, of Starz Entertainment’s total subscription units. Starz Entertainment’s operating expenses decreased 7.0% and increased 5.0% for the years ended December 31, 2007 and 2006, respectively, as compared to the corresponding prior year. The 2007 decrease is due primarily to a reduction in programming costs, which decreased from $703 million for the year ended December 31, 2006 to $656 million in 2007. The decrease in programming costs is due primarily to a lower effective rate for the movie titles exhibited in 2007. Such decrease was partially F-30 offset by an increase in the percentage of first-run movie exhibitions (which have a relatively higher cost per title) as compared to the number of library product exhibitions. In addition to the foregoing programming cost reductions, Starz Entertainment reversed an accrual in the amount of $7 million for music copyright fees in the third quarter of 2007 as a result of a settlement with a music copyright authority. Starz Entertainment expects it 2008 programming expenses to be comparable to the 2007 amount as lower license fees for movies are expected to be offset by costs for original programming. The 2006 increase in operating expenses is due primarily to an increase in programming costs from $668 million in 2005 to $703 million in 2006. The 2006 programming increase is due primarily to $63 million of additional amortization of deposits previously made under certain of its output arrangements. Such amortization was partially offset by a lower cost per title for movies under certain license agreements and a decrease in programming costs due to a lower percentage of first-run movie exhibitions (which have a relatively higher cost per title) as compared to the number of library product exhibitions. Starz Entertainment’s SG&A expenses increased 6.6% and decreased 16.5% during 2007 and 2006, respectively, as compared to the corresponding prior year. The 2007 increase is due primarily to increases in personnel costs and marketing expenses. The 2006 decrease is due primarily to lower sales and marketing expenses of $18 million due to the elimination of certain marketing support commitments under the Comcast affiliation agreement and less marketing with other affiliates, partially offset by marketing expenses related to the commercial launch of Starz Entertainment’s Internet product. Starz Entertainment has outstanding phantom stock appreciation rights held by its former chief executive officer. Starz Entertainment also has a long-term incentive plan for certain members of its current management team. Compensation relating to the phantom stock appreciation rights and the long-term incentive plan has been recorded based upon the estimated fair value of Starz Entertainment. The amount of expense associated with the phantom stock appreciation rights and the long-term incentive plan is generally based on the change in the fair value of Starz Entertainment. 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 subsidiaries 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 entering into interest rate swap arrangements and 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 variable rate debt with appropriate maturities and interest rates. As of December 31, 2007, the face amount of the Interactive Group’s fixed rate debt (considering the effects of interest rate swap agreements) was $5,867 million, which had a weighted average interest rate of 6.3%. The Interactive Group’s variable rate debt of $1,325 million had a weighted average interest rate of 6.7% at December 31, 2007. As of December 31, 2007, the face amount of the Capital Group’s fixed rate debt was $4,869 million, which F-31 had a weighted average interest rate of 2.7%. The Capital Group’s variable rate debt of $460 million had a weighted average interest rate of 6.0%. Each of the Interactive Group and the Capital Group is 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 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. At December 31, 2007, the fair value of our AFS securities attributed to the Interactive Group was $2,044 million and the fair value of our AFS securities attributed to the Capital Group was $15,490 million. Had the market price of such securities been 10% lower at December 31, 2006, the aggregate value of such securities would have been $204 million and $1,549 million lower, respectively, resulting in a decrease to unrealized holding gains in other comprehensive earnings. The decrease attributable to the Capital Group would be partially offset by an increase in the value of our AFS Derivatives. Because we mark our senior exchangeable debentures to fair value each reporting date, they are also subject to market risk. Increases in the stock price of the respective underlying security generally result in higher liabilities and unrealized losses in our statement of operations. The Interactive Group is exposed to foreign exchange rate fluctuations related primarily to the monetary assets and liabilities and the financial results of QVC’s foreign subsidiaries. Assets and liabilities of foreign subsidiaries for which the functional currency is the local currency are translated into U.S. dollars at period-end exchange rates, and the statements of operations are generally translated at the average exchange rate for the period. Exchange rate fluctuations on translating foreign currency financial statements into U.S. dollars that result in unrealized gains or losses are referred to as translation adjustments. Cumulative translation adjustments are recorded in other comprehensive earnings (loss) as a separate component of stockholders’ equity. Transactions denominated in currencies other than the functional currency are recorded based on exchange rates at the time such transactions arise. Subsequent changes in exchange rates result in transaction gains and losses, which are reflected in income as unrealized (based on period-end translations) or realized upon settlement of the transactions. Cash flows from our operations in foreign countries are translated at the average rate for the period. Accordingly, the Interactive Group may experience economic loss and a negative impact on earnings and equity with respect to our holdings solely as a result of foreign currency exchange rate fluctuations. We periodically assess the effectiveness of our derivative financial instruments. With regard to interest rate swaps, we monitor the fair value of interest rate swaps as well as the effective interest rate the interest rate swap yields, in comparison to historical interest rate trends. We believe that any losses incurred with regard to interest rate swaps would be offset by the effects of interest rate movements on the underlying debt facilities. With regard to equity collars, we monitor historical market trends relative to values currently present in the market. We believe that any unrealized losses incurred with regard to equity collars and swaps would be offset by the effects of fair value changes on the underlying assets. These measures allow our management to evaluate the success of our 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 F-32 settlement of the derivative instrument. To protect ourselves against credit risk associated with these counterparties we generally: (cid:127) execute our derivative instruments with several different counterparties, and (cid:127) execute equity derivative instrument agreements which contain a provision that requires the counterparty to post the ‘‘in the money’’ portion of the derivative instrument into a cash collateral account for our benefit, if the respective counterparty’s credit rating for its senior unsecured debt were to reach certain levels, generally a rating that is below Standard & Poor’s rating of A- and/or Moody’s rating of A3. Due to the importance of these derivative instruments to our risk management strategy, we actively monitor the creditworthiness of each of these counterparties. Based on our analysis, we currently consider nonperformance by any of our counterparties to be unlikely. Our counterparty credit risk by financial institution is summarized below: Counterparty Counterparty A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Counterparty B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Aggregate fair value of derivative instruments at December 31, 2007 amounts in millions $ 747 712 $1,459 Financial Statements and Supplementary Data. The consolidated financial statements of Liberty Media Corporation are found beginning on Page F-36. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. 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, 2007 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. See page F-34 for Management’s Report on Internal Control Over Financial Reporting. See page F-35 for Report of Independent Registered Public Accounting Firm for our accountant’s attestation regarding our internal control over financial reporting. There has been no change in the Company’s internal control over financial reporting that occurred during the three months ended December 31, 2007 that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting. Other Information. None. F-33 MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Liberty Media Corporation’s management is responsible for establishing and maintaining adequate internal control over the Company’s financial reporting. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the consolidated financial statements and related disclosures in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of the consolidated financial statements and related disclosures in accordance with generally accepted accounting principles; (3) provide reasonable assurance that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (4) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the consolidated financial statements and related disclosures. Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate. The Company assessed the design and effectiveness of internal control over financial reporting as of December 31, 2007. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (‘‘COSO’’) in Internal Control- Integrated Framework. Based upon our assessment using the criteria contained in COSO, management has concluded that, as of December 31, 2007, Liberty Media Corporation’s internal control over financial reporting is effectively designed and operating effectively. Liberty Media Corporation’s independent registered public accountants audited the consolidated financial statements and related disclosures in the Annual Report on Form 10-K and have issued an audit report on the effectiveness of the Company’s internal control over financial reporting. This report appears on page F-35. F-34 Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholders Liberty Media Corporation: We have audited Liberty Media Corporation’s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Liberty Media Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report On Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, Liberty Media Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Liberty Media Corporation and subsidiaries as of December 31, 2007 and 2006, and the related consolidated statements of operations, stockholders’ equity and comprehensive earnings (loss), and cash flows for each of the years in the three-year period ended December 31, 2007, and our report dated February 28, 2008 expressed an unqualified opinion on those consolidated financial statements. KPMG LLP Denver, Colorado February 28, 2008 F-35 Report of Independent Registered Public Accounting Firm 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, 2007 and 2006, and the related consolidated statements of operations, stockholders’ equity, comprehensive earnings (loss), and cash flows for each of the years in the three-year period ended December 31, 2007. 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 the standards of the Public Company Accounting Oversight Board (United States). 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, 2007 and 2006, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2007, in conformity with U.S. generally accepted accounting principles. As discussed in note 4 to the accompanying consolidated financial statements, effective January 1, 2007, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 155, Accounting for Certain Hybrid Financial Instruments, an amendment of FASB Statements No. 133 and 140, Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, and effective January 1, 2006 the Company adopted SFAS No. 123(R), Share-Based Payment. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Liberty Media Corporation’s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 28, 2008 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. KPMG LLP Denver, Colorado February 28, 2008 F-36 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 2007 and 2006 2007 2006 amounts in millions Assets Current assets: Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trade and other receivables, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inventory, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Program rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Current deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Assets of discontinued operations (note 6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,135 1,517 975 515 — 167 — Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,309 3,107 1,276 831 531 128 344 512 6,729 Investments in available-for-sale securities and other cost investments, including $1,183 million and $1,482 million pledged as collateral for share borrowing arrangements (note 7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investments in affiliates, accounted for using the equity method (note 10) . . . . . . . . Investment in special purpose entity (note 8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property and equipment, at cost Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Intangible assets not subject to amortization (note 4): Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trademarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,569 1,817 750 21,622 1,842 — 1,894 (543) 1,531 (385) 1,351 1,146 7,855 2,515 173 7,588 2,471 — 10,543 10,059 Intangible assets subject to amortization, net (note 4) . . . . . . . . . . . . . . . . . . . . . . . Other assets, at cost, net of accumulated amortization (note 8) . . . . . . . . . . . . . . . . 3,863 3,447 3,910 2,330 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $45,649 47,638 (continued) F-37 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Continued) December 31, 2007 and 2006 2007 2006 amounts in millions Liabilities and Stockholders’ Equity Current liabilities: Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Current portion of debt (note 11) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued stock compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Current deferred income tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other current liabilities (note 9) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Liabilities of discontinued operations (note 6) . . . . . . . . . . . . . . . . . . . . . . . . . Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 605 148 936 191 207 93 1,294 — 3,474 Long-term debt, including $3,690 million measured at fair value at December 31, 2007 (note 11) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred income tax liabilities (note 12) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,524 8,458 1,741 508 214 875 114 160 — 1,597 101 3,569 8,909 9,661 3,576 Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,197 25,715 Minority interests in equity of subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 866 290 Stockholders’ equity (note 13): Preferred stock, $.01 par value. Authorized 50,000,000 shares; no shares issued . Series A Liberty Capital common stock, $.01 par value. Authorized 400,000,000 shares; issued and outstanding 123,154,134 shares at December 31, 2007 and 134,503,165 shares at December 31, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . Series B Liberty Capital common stock, $.01 par value. Authorized 25,000,000 shares; issued and outstanding 5,988,319 shares at December 31, 2007 and 6,014,680 shares at December 31, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Series A Liberty Interactive common stock, $.01 par value. Authorized 2,000,000,000 shares; issued and outstanding 568,864,900 shares at December 31, 2007 and 623,061,760 shares at December 31, 2006 . . . . . . . . . Series B Liberty Interactive common stock, $.01 par value. Authorized 125,000,000 shares; issued and outstanding 29,502,405 shares at December 31, 2007 and 29,971,039 shares at December 31, 2006 . . . . . . . . . . . . . . . . . . . . . Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated other comprehensive earnings, net of taxes (note 17) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated deficit — 1 — 6 — 1 — 6 — 25,637 4,073 (10,131) — 28,112 5,952 (12,438) Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,586 21,633 Commitments and contingencies (note 19) Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 45,649 47,638 See accompanying notes to consolidated financial statements. F-38 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Years ended December 31, 2007, 2006 and 2005 2007 2006 2005 amounts in millions, except per share amounts Revenue: Net retail sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Communications and programming services . . . . . . . . . . . . . . . . . . . . . . . . $7,802 1,621 7,326 1,287 9,423 8,613 6,501 1,145 7,646 Operating costs and expenses: Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Selling, general and administrative, including stock-based compensation (note 4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Impairment of long-lived assets (note 4) . . . . . . . . . . . . . . . . . . . . . . . . . . 4,921 1,843 4,565 1,526 4,112 1,397 1,023 163 512 223 806 119 463 113 648 92 453 — 8,685 7,592 6,702 Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 738 1,021 944 Other income (expense): Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dividend and interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Share of earnings of affiliates, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Realized and unrealized gains (losses) on financial instruments, net (note 9) . . Gains (losses) on dispositions, net (notes 7 and 17) . . . . . . . . . . . . . . . . . . Other than temporary declines in fair value of investments (note 7) . . . . . . Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (641) 321 22 1,269 646 (33) (1) 1,583 (680) 214 91 (279) 607 (4) 18 (626) 143 13 257 (361) (449) (39) (33) (1,062) Earnings (loss) from continuing operations before income taxes and minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,321 988 (118) Income tax benefit (expense) (note 12) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Minority interests in earnings of subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . (321) (35) (252) (27) Earnings (loss) from continuing operations . . . . . . . . . . . . . . . . . . . . . . . Earnings from discontinued operations, net of taxes (note 6) . . . . . . . . . . . . . Cumulative effect of accounting change, net of taxes (note 4) . . . . . . . . . . . . 1,965 149 — Net earnings (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,114 Net earnings (loss): Liberty Series A and Series B common stock . . . . . . . . . . . . . . . . . . . . . . . Liberty Capital common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Liberty Interactive common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — 1,673 441 $2,114 709 220 (89) 840 94 260 486 840 126 (51) (43) 10 — (33) (33) — — (33) (continued) F-39 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Continued) Years ended December 31, 2007, 2006 and 2005 2007 2006 2005 amounts in millions, except per share amounts Basic earnings (loss) from continuing operations per common share (note 4): Liberty Series A and Series B common stock . . . . . . . . . . . . . . . . . . . . . . . Series A and Series B Liberty Capital common stock . . . . . . . . . . . . . . . . . Series A and Series B Liberty Interactive common stock . . . . . . . . . . . . . . . $ — $11.55 .70 $ Basic net earnings (loss) per common share (note 4): Liberty Series A and Series B common stock . . . . . . . . . . . . . . . . . . . . . . . Series A and Series B Liberty Capital common stock . . . . . . . . . . . . . . . . . Series A and Series B Liberty Interactive common stock . . . . . . . . . . . . . . . $ — $12.67 .70 $ Diluted earnings (loss) from continuing operations per common share (note 4): Liberty Series A and Series B common stock . . . . . . . . . . . . . . . . . . . . . . . Series A and Series B Liberty Capital common stock . . . . . . . . . . . . . . . . . Series A and Series B Liberty Interactive common stock . . . . . . . . . . . . . . . $ — $11.46 .69 $ Diluted net earnings (loss) per common share (note 4): Liberty Series A and Series B common stock . . . . . . . . . . . . . . . . . . . . . . . Series A and Series B Liberty Capital common stock . . . . . . . . . . . . . . . . . Series A and Series B Liberty Interactive common stock . . . . . . . . . . . . . . . $ — $12.58 .69 $ .07 .24 .73 .03 1.86 .73 .07 .24 .73 .03 1.86 .73 (.02) — — (.01) — — (.02) — — (.01) — — See accompanying notes to consolidated financial statements. F-40 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS (LOSS) Years ended December 31, 2007, 2006 and 2005 2007 2006 2005 amounts in millions Net earnings (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,114 840 (33) Other comprehensive earnings (loss), net of taxes (note 17): Foreign currency translation adjustments . . . . . . . . . . . . . . . . . . . . . . . . . Recognition of previously unrealized foreign currency translation losses . . . Unrealized holding gains (losses) arising during the period . . . . . . . . . . . . Recognition of previously unrealized losses (gains) on available-for-sale 107 — 111 — (1,611) 2,605 (5) 312 (1,121) securities, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (375) (185) 217 Reclass unrealized gain on available-for-sale security to equity method investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other comprehensive earnings (loss) from discontinued operations (note 6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — (197) — (7) Other comprehensive earnings (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,879) 2,531 (801) Comprehensive earnings (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 235 3,371 (834) Comprehensive earnings (loss): Liberty Series A and Series B common stock . . . . . . . . . . . . . . . . . . . . . . Liberty Capital common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Liberty Interactive common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — 755 1,787 829 135 100 $ 235 3,371 (834) — — (834) See accompanying notes to consolidated financial statements. F-41 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 2007, 2006 and 2005 2007 2006 2005 amounts in millions (see note 5) Cash flows from operating activities: Net earnings (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: $ 2,114 840 (33) Earnings from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cumulative effect of accounting change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Impairment of long-lived assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash payments for stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Noncash interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Share of earnings of affiliates, net Realized and unrealized losses (gains) on financial instruments, net . . . . . . . . . . . . . . . . . . Losses (gains) on disposition of assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other than temporary declines in fair value of investments . . . . . . . . . . . . . . . . . . . . . . . . Minority interests in earnings of subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other noncash charges, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Changes in operating assets and liabilities, net of the effects of acquisitions and dispositions: Current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Payables and other current liabilities (149) — 675 223 93 (40) 9 (22) (1,269) (646) 33 35 120 141 (436) 277 (220) 89 582 113 67 (115) 108 (91) 279 (607) 4 27 (465) 44 (302) 660 (10) — 545 — 52 (103) 101 (13) (257) 361 449 51 (389) 41 (175) 446 Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,158 1,013 1,066 Cash flows from investing activities: Cash proceeds from dispositions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Premium proceeds from origination of derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net proceeds from settlement of derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash received in exchange transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash paid for acquisitions, net of cash acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investments in and loans to cost and equity investees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment in special purpose entity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net sales (purchases) of short term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net increase in restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other investing activities, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash provided (used) by investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash flows from financing activities: Borrowings of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Repayments of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Repurchases of Liberty common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Contribution from minority owner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other financing activities, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash provided (used) by financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Effect of foreign currency exchange rates on cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash provided by (to) discontinued operations: Cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash used by investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash provided by financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in available cash held by discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash provided by (to) discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 495 — 75 1,154 (348) (159) (750) (316) 34 (882) (36) (733) 1,869 (498) (2,529) 751 1 (406) 8 8 (9) — 2 1 Net increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 3,107 Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,135 1,322 59 101 — (1,207) (235) — (278) 287 — 66 115 3,229 (2,191) (954) — (20) 64 18 62 (67) 6 — 1 1,211 1,896 3,107 49 473 461 — (96) (24) — (168) (85) — (7) 603 861 (1,801) — — 89 (851) (45) 75 (110) 11 (177) (201) 572 1,324 1,896 See accompanying notes to consolidated financial statements. F-42 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY Years ended December 31, 2007, 2006 and 2005 Common stock Liberty Capital Liberty Interactive Series A Series B Series A Series B Series A Series B Preferred stock Additional paid-in capital Accumulated other Total comprehensive Accumulated Treasury stockholders’ earnings deficit stock equity amounts in millions F - 4 3 Balance at January 1, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . Issuance of Series A common stock for investment in $— — — available-for-sale security . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of deferred compensation . . . . . . . . . . . . . . . . . . Distribution to stockholders for spin off of Discovery Holding Company (‘‘DHC’’) (note 6) . . . . . . . . . . . . . . . . . . . . . . . . Losses in connection with issuances of stock by subsidiaries and affiliates, net of taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . Issuance of common stock upon exercise of stock options . . . . . . . AT&T tax sharing agreement adjustments . . . . . . . . . . . . . . . . . Adjustment of spin off of Liberty Media International . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance at December 31, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other comprehensive earnings . . . . . . . . . . . . . . . . . . . . . . . . Retirement of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . Distribution of Liberty Capital and Liberty Interactive common stock to stockholders (note 2) . . . . . . . . . . . . . . . . . . . . . . . Issuance of common stock upon exercise of stock options . . . . . . . Stock compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Issuance of Series A Liberty Interactive common stock for acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Series A Liberty Interactive stock repurchases . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance at December 31, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . Cumulative effects of accounting changes (note 4) . . . . . . . . . . . . Issuance of common stock upon exercise of stock options . . . . . . . Stock compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Issuance of Series A Liberty Interactive common stock for acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Series A Liberty Interactive stock repurchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Series A Liberty Capital stock repurchases Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — — — — — — — — — — — — — — — — — — — — — — — — — — Balance at December 31, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . $— See accompanying notes to consolidated financial statements. 27 — — — — — — — — — — 27 — — — 1 — — — — — — — — — — 1 — — — (27) — — (1) — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 1 — — — — — 1 — — — — — — — — — 1 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 7 — — — (1) — 6 — — — — — — — — — 6 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 33,701 — — 14 38 (4,609) (22) 10 (40) (28) 10 29,074 — — (125) 20 4 62 36 (953) (6) 28,112 — — — 35 24 7 (1,224) (1,305) (12) 25,637 4,227 — (801) (13,245) (33) — (125) — — 24,586 (33) (801) — — (5) — — — — — 3,421 — 2,531 — — — — — — — 5,952 — (1,879) — — — — — — — — — — — — — — — — — — — — — — — (13,278) 840 — — (125) — — 125 — — — — — — (12,438) 2,114 — 193 — — — — — — — — — — — — — — — — — — — — — — — 14 38 (4,614) (22) 10 (40) (28) 10 19,120 840 2,531 — — 4 62 36 (954) (6) 21,633 2,114 (1,879) 193 35 24 7 (1,224) (1,305) (12) 19,586 4,073 (10,131) LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2007, 2006 and 2005 (1) Basis of Presentation The accompanying consolidated financial statements include the accounts of Liberty Media Corporation and its controlled subsidiaries (collectively, ‘‘Liberty’’ or the ‘‘Company’’ unless the context otherwise requires). All significant intercompany accounts and transactions have been eliminated in consolidation. Liberty, through its ownership of interests in subsidiaries and other companies, is primarily engaged in the video and on-line commerce, media, communications and entertainment industries in North America, Europe and Asia. (2) Tracking Stocks On May 9, 2006, Liberty completed a restructuring (the ‘‘Restructuring’’) pursuant to which the Company was organized as a new holding company. In the Restructuring, Liberty became the new publicly traded parent company of Liberty Media LLC (formerly known as Liberty Media Corporation, ‘‘Old Liberty’’). In the Restructuring, each holder of Old Liberty’s common stock received for each share of Old Liberty’s Series A common stock held immediately prior to the Restructuring, 0.25 of a share of the Company’s Series A Liberty Interactive common stock and 0.05 of a share of the Company’s Series A Liberty Capital common stock, and for each share of Old Liberty’s Series B common stock held immediately prior to the Restructuring, 0.25 of a share of the Company’s Series B Liberty Interactive common stock and 0.05 of a share of the Company’s Series B Liberty Capital common stock, in each case, with cash in lieu of any fractional shares. Liberty is the successor reporting company to Old Liberty. Each tracking stock issued in the Restructuring is intended to track and reflect the economic performance of one of two groups, the Interactive Group and the Capital Group, respectively. Tracking stock is a type of common stock that the issuing company intends to reflect or ‘‘track’’ the economic performance of a particular business or ‘‘group,’’ rather than the economic performance of the company as a whole. While the Interactive Group and the Capital Group have separate collections of businesses, assets and liabilities attributed to them, neither group is a separate legal entity and therefore cannot own assets, issue securities or enter into legally binding agreements. Holders of tracking stocks have no direct claim to the group’s stock or assets and are not represented by separate boards of directors. Instead, holders of tracking stock are stockholders of the parent corporation, with a single board of directors and subject to all of the risks and liabilities of the parent corporation. The term ‘‘Interactive Group’’ does not represent a separate legal entity, rather it represents those businesses, assets and liabilities which Liberty has attributed to that group. The assets and businesses Liberty has attributed to the Interactive Group are those engaged in video and on-line commerce, and include its interests in QVC, Inc. (‘‘QVC’’), Provide Commerce, Inc. (‘‘Provide’’), BuySeasons, Inc. (‘‘BuySeasons’’), Backcountry.com, Inc. (‘‘Backcountry’’), Bodybuilding.com, LLC (‘‘Bodybuilding’’), Expedia, Inc. and IAC/InterActiveCorp. The Interactive Group will also include such other businesses, assets and liabilities that Liberty’s board of directors may in the future determine to attribute to the Interactive Group, including such other businesses and assets as Liberty may acquire for the Interactive Group. In addition, Liberty has attributed $3,108 million principal amount (as of December 31, 2007) of its senior notes and debentures to the Interactive Group. The term ‘‘Capital Group’’ also does not represent a separate legal entity, rather it represents all of Liberty’s businesses, assets and liabilities other than those which have been attributed to the F-44 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) Interactive Group. The assets and businesses attributed to the Capital Group include Liberty’s subsidiaries: Starz Entertainment, LLC (‘‘Starz Entertainment’’), Starz Media, LLC (‘‘Starz Media’’), FUN Technologies, Inc. (‘‘FUN’’), Atlanta National League Baseball Club, Inc. (‘‘ANLBC’’), Leisure Arts, Inc. (‘‘Leisure Arts’’), TruePosition, Inc. (‘‘TruePosition’’) and WFRV and WJMN Television Station, Inc. (‘‘WFRV TV Station’’); its equity affiliates: GSN, LLC and WildBlue Communications, Inc.; and its interests in News Corporation, Time Warner Inc. and Sprint Nextel Corporation. The Capital Group will also include such other businesses, assets and liabilities that Liberty’s board of directors may in the future determine to attribute to the Capital Group, including such other businesses and assets as Liberty may acquire for the Capital Group. In addition, Liberty has attributed $5,231 million principal amount (as of December 31, 2007) of its senior exchangeable debentures and bank debt to the Capital Group. See Exhibit 99.1 to this Annual Report on Form 10-K for unaudited attributed financial information for Liberty’s tracking stock groups. (3) News Corporation Exchange and Proposed Tracking Stocks Subsequent to December 31, 2007, Liberty completed an exchange transaction (the ‘‘News Corporation Exchange’’) with News Corporation pursuant to which Liberty exchanged its approximate 16% ownership interest in News Corporation for a subsidiary of News Corporation which holds an approximate 41% interest in The DIRECTV Group, Inc., three regional sports television networks and approximately $465 million in cash. In connection with the consummation of the News Corporation Exchange, Liberty intends to amend and restated its certificate of incorporation to reclassify the Liberty Capital common stock into two new tracking stocks, one to retain the designation Liberty Capital common stock and the other to be designated the Liberty Entertainment common stock (the ‘‘Reclassification’’). Upon completion of the Reclassification, the Liberty Entertainment common stock would be intended to track and reflect the separate economic performance of a newly designated Entertainment Group, which initially would have attributed to it a portion of the businesses, assets and liabilities that are currently attributed to the Capital Group, including Liberty’s subsidiaries Starz Entertainment and FUN, its equity interests in GSN, LLC and WildBlue Communications, Inc. and approximately $500 million of cash and $551 million principal amount (as of December 31, 2007) of Liberty’s publicly-traded debt. In addition, Liberty would attribute to the Entertainment Group all of the businesses and assets received in the News Corporation Exchange. Upon implementation of the Reclassification, the Capital Group would have attributed to it all of Liberty’s businesses, assets and liabilities not attributed to the Interactive Group or the Entertainment Group, including its subsidiaries Starz Media, ANLBC, Leisure Arts, TruePosition and WFRV TV Station, and minority equity investments in Time Warner Inc. and Sprint Nextel Corporation. In addition, the Capital Group would have attributed to it $3,930 million principal amount (as of December 31, 2007) of Liberty’s existing publicly-traded debt and $750 million of its bank debt. The Reclassification would not change the businesses, assets and liabilities attributed to the Interactive Group. F-45 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (4) 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 $80 million and $72 million at December 31, 2007 and 2006, respectively. A summary of activity in the allowance for doubtful accounts is as follows: 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inventory Balance beginning of year $72 $66 $63 Additions Charged to expense Acquisitions Deductions- write-offs amounts in millions 1 14 — 41 27 37 (34) (35) (34) Balance end of year 80 72 66 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 Program rights are amortized on a film-by-film basis over the anticipated number of exhibitions. Program rights payable are initially recorded at the estimated cost of the programs when the film is available for airing. Investment in Films and Television Programs Investment in films and television programs generally includes the cost of proprietary films and television programs that have been released, completed and not released, in production, and in development or pre-production. Capitalized costs include the acquisition of story rights, the development of stories, production labor, postproduction costs and allocable overhead and interest costs. Investment in films and television programs is stated at the lower of unamortized cost or estimated fair value on an individual film basis. Investment in films and television programs is amortized using the individual-film-forecast method, whereby the costs are charged to expense and participation and residual costs are accrued based on the proportion that current revenue from the films bear to an estimate of total revenue anticipated from all markets (ultimate revenue). Ultimate revenue estimates generally may not exceed ten years following the date of initial release or from the date of delivery of the first episode for episodic television series. Estimates of ultimate revenue involve uncertainty and it is therefore possible that reductions in the carrying value of investment in films and television programs may be required as a consequence of changes in management’s future revenue estimates. F-46 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) Investment in films and television programs in development or pre-production is periodically reviewed to determine whether they will ultimately be used in the production of a film. Costs of films in development or pre-production are charged to expense if the project is abandoned, or if the film has not been set for production within three years from the time of the first capitalized transaction. The investment in films and television programs is reviewed for impairment on a title-by-title basis when an event or change in circumstances indicates that a film should be assessed. If the estimated fair value of a film is less than its unamortized cost, then the excess of unamortized costs over the estimated fair value is charged to expense. Investments All marketable equity and debt securities held by the Company are classified as available-for-sale (‘‘AFS’’) and are carried at fair value generally based on quoted market prices. Unrealized holding gains and losses on AFS securities are carried 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 affiliate as they occur rather than as dividends or other distributions are received. Losses are limited to the extent of the Company’s investment in, advances to and commitments for the investee. 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. 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 other than temporary, 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 other than temporary declines in fair values of investments. Writedowns for equity method investments are included in share of earnings (losses) of affiliates. F-47 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) Derivative Instruments and Hedging Activities The Company uses various derivative instruments including equity collars, bond swaps and interest rate swaps to manage fair value and cash flow risk associated with many of its investments and some of its variable rate debt. 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. 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: (cid:127) executes its derivative instruments with several different counterparties, and (cid:127) 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. Liberty accounts for its derivatives pursuant to Statement of Financial Accounting Standards No. 133, ‘‘Accounting for Derivative Instruments and Hedging Activities’’ (‘‘Statement 133’’) and related amendments and interpretations. 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 and are recognized in the statement of operations when the hedged item affects 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. The Company has entered into several interest rate swap agreements to mitigate the cash flow risk associated with interest payments related to certain of its variable rate debt. These interest rate swap arrangements have been designated as cash flow hedges. The Company assesses the effectiveness of its interest rate swaps using the hypothetical derivative method. Hedge ineffectiveness had no impact on earnings for the years ended December 31, 2007 and 2006. None of the Company’s other derivatives have been designated as hedges. The fair value of the Company’s equity collars and other similar 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 remaining 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 F-48 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) results upon settlement or unwinding of derivative instruments may differ materially from these estimates. Effective January 1, 2007, Liberty adopted Statement of Financial Accounting Standards No. 155, ‘‘Accounting for Certain Hybrid Financial Instruments, an amendment of FASB Statements No. 133 and 140’’ (‘‘Statement 155’’). Statement 155, among other things, amends Statement 133 and permits fair value remeasurement of hybrid financial instruments that contain an embedded derivative that otherwise would require bifurcation. Under Statement 133, Liberty reported the fair value of the call option feature of its senior exchangeable debentures separate from the long-term debt. The long-term debt portion was reported as the difference between the face amount of the debenture and the fair value of the call option feature on the date of issuance and was accreted through interest expense to its face amount over the expected term of the debenture. Pursuant to the provisions of Statement 155, Liberty now accounts for its senior exchangeable debentures at fair value rather than bifurcating such instruments into a debt instrument and a derivative instrument. Decreases in the fair value of the exchangeable debentures are included in realized and unrealized gains on financial instruments in the accompanying consolidated statements of operations and aggregated $541 million for the year ended December 31, 2007. The impact—increase/(decrease)—on Liberty’s balance sheet of the adoption of Statement 155 is as follows (amounts in millions): Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term financial instrument liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred income tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (47) $(1,280) $ 1,848 $ (234) 381 $ 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 The Company accounts for its intangible assets pursuant to Statement of Financial Accounting Standards No. 142, ‘‘Goodwill and Other Intangible Assets’’ (‘‘Statement 142’’). Statement 142 requires that goodwill and other intangible assets with indefinite useful lives (collectively, ‘‘indefinite lived intangible assets’’) not be amortized, but instead be tested for impairment at least annually. Equity method goodwill is also not amortized, but is considered for impairment pursuant to 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 requires the Company to perform an annual assessment of whether there is an indication that goodwill is impaired. To accomplish this, the Company identifies its reporting units and determines the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units. Statement 142 requires the Company to consider equity method affiliates as separate reporting units. As a result, a portion of the Company’s F-49 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) enterprise-level goodwill balance is allocated to various reporting units which include a single equity method investment as its only asset. 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 determines the fair value of its reporting units using independent appraisals, public trading prices and other means. The Company then compares the fair value of each reporting unit to the reporting unit’s carrying amount. To the extent a reporting unit’s carrying amount exceeds its fair value, the Company compares 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, and records an impairment charge to the extent the carrying amount exceeds the implied fair value. Goodwill Changes in the carrying amount of goodwill are as follows: QVC Entertainment Media Other Total Starz Starz amounts in millions Balance at January 1, 2006 . . . . . . . . . . . . . . . . . . . . . . Acquisitions(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Disposition(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Impairment(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign currency translation adjustments . . . . . . . . . . . Other(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance at December 31, 2006 . . . . . . . . . . . . . . . . . . . . Acquisitions(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Impairment(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign currency translation adjustments . . . . . . . . . . . Other(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $5,273 5 — — 60 78 5,416 — — 44 (41) Balance at December 31, 2007 . . . . . . . . . . . . . . . . . . . . $5,419 1,383 — — — — (12) 1,371 — — — — 1,371 — 153 357 521 — (124) — (111) — — 5 — 357 444 — 466 (32) — (7) (182) 14 5 6,809 883 (124) (111) 60 71 7,588 466 (214) 58 (43) 194 871 7,855 (1) During the year ended December 31, 2007, Liberty completed several exchange transactions in which it received ANLBC, Leisure Arts and WFRV TV Station. Liberty also acquired Backcountry and Bodybuilding. The foregoing transactions resulted in the recording of $466 million of goodwill. During the year ended December 31, 2006, Liberty and its subsidiaries completed several acquisitions, including the acquisition of controlling interests in Provide, FUN, BuySeasons and IDT Entertainment, Inc., for aggregate cash consideration of $876 million, net of cash acquired, the issuance of Liberty common stock and the assumption of debt. In connection with these acquisitions, Liberty recorded goodwill of $883 million. The goodwill recorded for these transactions in 2007 and 2006 represents the difference between the consideration paid and the estimated fair value of the assets acquired. (2) During the second quarter of 2006, the Company sold its 50% interest in Courtroom Television Network, LLC (‘‘Court TV’’). In connection with such sale, the Company relieved $124 million of enterprise-level goodwill that had been allocated to the Court TV investment. F-50 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (3) In connection with its 2007 annual evaluation of the recoverability of Starz Media’s goodwill, Liberty estimated the fair value of Starz Media’s reporting units and concluded that the carrying value of certain reporting units exceeded their respective fair values. Accordingly, Liberty recognized a $182 million impairment charge related to goodwill. During the third quarter of 2007, FUN recognized a $32 million goodwill and $9 million other intangible impairment loss related to its sports information segment due to new competitors in the marketplace and the resulting loss of revenue and operating income. Liberty acquired its interest in FUN in March 2006. Subsequent to its acquisition, the market value of FUN’s stock declined significantly due to the performance of certain of FUN’s subsidiaries and uncertainty surrounding government legislation of Internet gambling which Liberty believes the market perceives as potentially impacting FUN’s skill gaming business. In connection with its 2006 annual evaluation of the recoverability of FUN’s goodwill, Liberty estimated the fair value of FUN using a combination of discounted cash flows and market comparisons and concluded that the carrying value of FUN’s goodwill exceeded its fair value. Accordingly, Liberty recognized a $111 million impairment charge related to goodwill. (4) Other activity for QVC in 2006 represents Liberty’s acquisition of shares of QVC common stock held by employees and officers of QVC. Amounts recorded as goodwill represent the difference between the price paid for such minority interest and the carrying amount of the minority interest less amounts allocated to other intangible assets. (5) Other activity for QVC in 2007 primarily relates to the reversal of certain tax reserves in connection with the adoption of FIN 48. Such tax reserves were established prior to Liberty’s acquisition of a controlling interest in QVC in 2003. Accordingly, the offset to the reversal of the tax reserves is a reduction of goodwill. Intangible Assets Subject to Amortization Intangible assets subject to amortization are comprised of the following: December 31, 2007 December 31, 2006 Gross carrying amount Accumulated amortization Distribution rights . . . . . . . . . . . . . . . . Customer relationships . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . $2,326 2,669 911 (715) (785) (543) Net carrying amount Gross carrying amount amounts in millions 2,699 1,611 2,545 1,884 699 368 Total . . . . . . . . . . . . . . . . . . . . . . . . . . $5,906 (2,043) 3,863 5,943 (2,033) Accumulated amortization Net carrying amount (981) (581) (471) 1,718 1,964 228 3,910 Distribution rights and customer relationships are amortized primarily over 14 years and 10-14 years, respectively. Amortization expense was $512 million, $463 million and $453 million for the years ended December 31, 2007, 2006 and 2005, respectively. Based on its amortizable intangible assets as of December 31, 2007, Liberty expects that amortization expense will be as follows for the next five years (amounts in millions): 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $508 $458 $422 $388 $369 F-51 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) 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. 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. Assets and liabilities of foreign subsidiaries are translated at the spot rate in effect at the applicable reporting date, and the consolidated statements of operations 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 earnings as unrealized (based on the applicable period-end exchange rate) or realized upon settlement of the transactions. Revenue Recognition Revenue is recognized as follows: (cid:127) Revenue from 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 years ended December 31, 2007, 2006 and 2005 aggregated $1,651 million, $1,554 million and $1,375 million, respectively. (cid:127) Programming revenue is recognized in the period during which programming is provided, pursuant to affiliation agreements. (cid:127) 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 F-52 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) evidence does not exist, revenue is deferred and recognized on a straight-line basis over the remaining term of the maintenance period after all other elements have been delivered. (cid:127) Revenue relating to proprietary films is recognized in accordance with Statement of Position (SOP) 00-02, Accounting by Producers or Distributors of Films. Revenue from the theatrical release of feature films is recognized at the time of exhibition based on the Company’s participation in box office receipts. Revenue from television licensing is recognized when the film or program is complete in accordance with the terms of the arrangement, the license period has begun and is available for telecast or exploitation. Cost of Sales 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 $169 million, $112 million and $45 million for the years ended December 31, 2007, 2006 and 2005, 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 FASB Statement 123R As more fully described in note 15, the Company has granted to its directors, employees and employees of its subsidiaries options, stock appreciation rights (‘‘SARs’’) and options with tandem SARs to purchase shares of Liberty common stock (collectively, ‘‘Awards’’). In addition, QVC had granted combination stock options/SARs (‘‘QVC Awards’’) to certain of its employees. In December 2004, the Financial Accounting Standards Board (‘‘FASB’’) issued Statement of Financial Accounting Standards No. 123 (revised 2004), ‘‘Share-Based Payment’’ (‘‘Statement 123R’’). Statement 123R, which is a revision of Statement of Financial Accounting Standards No. 123, ‘‘Accounting for Stock-Based Compensation’’ (‘‘Statement 123’’) and supersedes Accounting Principles Board Opinion No. 25, ‘‘Accounting for Stock Issued to Employees’’ (‘‘APB Opinion No. 25’’), establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services, primarily focusing on transactions in which an entity obtains employee services. Statement 123R generally requires companies to measure the cost of employee services received in exchange for an award of equity instruments (such as stock options and restricted stock) based on the grant-date fair value of the award, and to recognize that cost over the period during which the employee is required to provide service (usually the vesting period of the award). Statement 123R also requires companies to measure the cost of employee services received in exchange for an award of liability instruments (such as stock appreciation rights that will be settled in cash) based on the current fair value of the award, and to remeasure the fair value of the award at each reporting date. The Company adopted Statement 123R effective January 1, 2006. In connection with such adoption, the Company recorded an $89 million transition adjustment loss, which is net of related income taxes of $31 million. Under Statement 123R, the QVC Awards were required to be bifurcated into a liability award and an equity award. Previously, under APB Opinion No. 25, no liability was recorded. The transition adjustment primarily represents the fair value of the liability portion of the F-53 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) QVC Awards at January 1, 2006. The transition adjustment is reflected in the accompanying consolidated statement of operations as the cumulative effect of accounting change. Included in selling, general and administrative expenses in the accompanying consolidated statements of operations are the following amounts of stock-based compensation (amounts in millions): Years ended: December 31, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 31, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 31, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $93 $67 $52 As of December 31, 2007, the total unrecognized compensation cost related to unvested Liberty equity awards was approximately $81 million. Such amount will be recognized in the Company’s consolidated statements of operations over a weighted average period of approximately 2 years. Pro Forma Disclosure Prior to adoption of Statement 123R, the Company accounted for compensation expense related to its Awards pursuant to the recognition and measurement provisions of APB Opinion No. 25. All of the Company’s Awards were accounted for as variable plan awards, and compensation was recognized based upon the percentage of the options that were vested and the intrinsic value of the options at the balance sheet date. The Company accounted for QVC Awards using fixed-plan accounting. The following table illustrates the effect on earnings from continuing operations and earnings per share for the year ended December 31, 2005 as if the Company had applied the fair value recognition provisions of Statement 123 to its options. Compensation expense for SARs and options with tandem SARs was the same under APB Opinion No. 25 and Statement 123. Accordingly, no pro forma adjustment for such Awards is included in the following table (amounts in millions, except per share amounts). Year ended December 31, 2005 Loss from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (43) Add stock compensation as determined under the intrinsic value method, net of taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Deduct stock compensation as determined under the fair value method, net of taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pro forma loss from continuing operations . . . . . . . . . . . . . . . . . . . . . . Basic and diluted loss from continuing operations per share: As reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pro forma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (42) $ (83) $(.02) $(.03) Impact of Spin Off Transactions In connection with the spin off of Liberty subsidiaries Liberty Media International (‘‘LMI’’) and Discovery Holding Company (‘‘DHC’’) in 2004 and 2005, respectively, certain employees of Liberty received LMI and DHC options. Liberty records compensation expense related to these awards based on the grant date fair value over the remaining vesting period. F-54 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) Income Taxes The Company accounts for income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying value amounts and income tax bases of assets and liabilities and the expected benefits of utilizing net operating loss and tax credit carryforwards. The deferred tax assets and liabilities are calculated using enacted tax rates in effect for each taxing jurisdiction in which the company operates for the year in which those temporary differences are expected to be recovered or settled. Net deferred tax assets are then reduced by a valuation allowance if the Company believes it more-likely-than-not such net deferred tax assets will not be realized. The effect on deferred tax assets and liabilities of an enacted change in tax rates is recognized in income in the period that includes the enactment date. Effective January 1, 2007, Liberty adopted FASB Interpretation No. 48, ‘‘Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109’’ (‘‘FIN 48’’). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. In instances where the Company has taken or expects to take a tax position in its tax return and the Company believes it is more likely than not that such tax position will be upheld by the relevant taxing authority, the Company may record a benefit for such tax position in its consolidated financial statements. The impact—increase/(decrease)—on Liberty’s balance sheet of the January 1, 2007 adoption of FIN 48 is as follows (amounts in millions): Tax liabilities (including interest and penalties) . . . . . . . . . . . . . . . . . . . . . . Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(634) $ (31) $ 36 $(574) 7 $ When the tax law requires interest to be paid on an underpayment of income taxes, the Company recognizes interest expense from the first period the interest would begin accruing according to the relevant tax law. Such interest expense is included in interest expense in the accompanying consolidated statements of operations. Any accrual of penalties related to underpayment of income taxes on uncertain tax positions is included in other income (expense) in the accompanying consolidated statements of operations. Earnings (Loss) Per Common Share Basic earnings (loss) per common share (‘‘EPS’’) is computed by dividing net earnings (loss) by the weighted average number of common shares outstanding for the period. Diluted EPS presents the dilutive effect on a per share basis of potential common shares as if they had been converted at the beginning of the periods presented. Liberty Series A and Series B Common Stock The basic EPS calculation is based on 2,803 million weighted average outstanding shares of Liberty common stock for the period from January 1, 2006 to May 9, 2006, and 2,795 million weighted average shares outstanding for the year ended December 31, 2005. The diluted EPS calculation for the period from January 1, 2006 to May 9, 2006 includes 5 million dilutive securities. However, due to the relative F-55 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) insignificance of these dilutive securities, their inclusion does not impact the EPS amount as reported in the accompanying consolidated statement of operations. The cumulative effect of accounting change per common share for the period from January 1, 2006 to May 9, 2006 was a loss of $0.03. Earnings (loss) from discontinued operations per common share was less than $.01 for 2006 and 2005. Series A and Series B Liberty Capital Common Stock Liberty Capital basic EPS for the year ended December 31, 2007 and for the period from the Restructuring to December 31, 2006 was computed by dividing the net earnings attributable to the Capital Group by the weighted average outstanding shares of Liberty Capital common stock for the period (132 million and 140 million, respectively). Fully diluted EPS for the year ended December 31, 2007 includes 1 million common stock equivalents. Due to the relative insignificance of the dilutive securities for the period from the Restructuring to December 31, 2006, their inclusion does not impact the EPS amount. Excluded from diluted EPS for the year ended December 31, 2007 are less than 1 million potential common shares because their inclusion would be anti-dilutive. Earnings from discontinued operations per common share for the year ended December 31, 2007 and for the period from the Restructuring to December 31, 2006 is $1.13 and $1.62, respectively. Series A and Series B Liberty Interactive Common Stock Liberty Interactive basic EPS for the year ended December 31, 2007 and for the period from the Restructuring to December 31, 2006 was computed by dividing the net earnings attributable to the Interactive Group by the weighted average outstanding shares of Liberty Interactive common stock for the period (634 million and 670 million, respectively). Fully diluted EPS for the year ended December 31, 2007 includes 2 million common stock equivalents. Due to the relative insignificance of the dilutive securities for the period from the Restructuring to December 31, 2006, their inclusion does not impact the EPS amount. Excluded from diluted EPS for the year ended December 31, 2007 are approximately 28 million potential common shares because their inclusion would be anti-dilutive. Estimates The preparation of financial statements in conformity with U.S. generally accepted accounting principles (‘‘GAAP’’) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Liberty considers (i) the estimate of the fair value of its long-lived assets (including goodwill) and any resulting impairment charges, (ii) its accounting for income taxes, (iii) its assessment of other than temporary declines in value of its investments and (iv) its estimates of retail related adjustments and allowances to be its most significant estimates. Liberty holds 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 to provide it with accurate financial information prepared in accordance with GAAP that Liberty uses in the application of the equity method. In addition, Liberty relies on audit reports that are provided by the affiliates’ independent auditors on the financial statements of such affiliates. The Company is not aware, however, of any errors in or possible F-56 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) misstatements of the financial information provided by its equity affiliates that would have a material effect on Liberty’s consolidated financial statements. Recent Accounting Pronouncements In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, ‘‘Fair Value Measurements’’ (‘‘Statement 157’’), which defines fair value, establishes a framework for measuring fair value under GAAP and expands disclosures about fair value measurements. Statement 157 applies to other accounting pronouncements that require or permit fair value measurements. The new guidance is effective for financial statements issued for fiscal years beginning after November 15, 2007, and for interim periods within those fiscal years. Liberty does not expect that its adoption of Statement 157 will have a significant impact on the reported amounts of the assets and liabilities that it reports at fair value in its consolidated balance sheet. In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, ‘‘The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115’’ (‘‘Statement 159’’). Statement 159 permits entities to choose to measure many financial instruments, such as AFS securities, and certain other items at fair value and to recognize the changes in fair value of such instruments in the entity’s statement of operations. Currently under Statement of Financial Accounting Standards No. 115, entities are required to recognize changes in fair value of AFS securities in the balance sheet in accumulated other comprehensive earnings. Statement 159 is effective as of the beginning of an entity’s fiscal year that begins after November 15, 2007. Effective January 1, 2008, Liberty plans to apply the provisions of Statement 159 to certain of its AFS securities which it considers non-strategic. As a result, changes in the fair value of the subject securities will be reported in unrealized gains/losses in its consolidated statement of operations, rather than a component of accumulated other comprehensive earnings in its consolidated balance sheet. The fair value of such securities was $4,839 million at December 31, 2007, and the amount of unrealized gains included in other comprehensive earnings that will be included in Liberty’s cumulative effect of accounting change and reclassified to retained earnings upon adoption of Statement 159 is $1,039 million. In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised 2007), ‘‘Business Combinations’’ (‘‘Statement 141R’’). Statement 141R replaces Statement of Financial Accounting Standards No. 141, ‘‘Business Combinations’’ (‘‘Statement 141’’), although it retains the fundamental requirement in Statement 141 that the acquisition method of accounting be used for all business combinations. Statement 141R establishes principles and requirements for how the acquirer in a business combination (a) recognizes and measures the assets acquired, liabilities assumed and any noncontrolling interest in the acquiree, (b) recognizes and measures the goodwill acquired in a business combination or a gain from a bargain purchase and (c) determines what information to disclose regarding the business combination. Statement 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first fiscal year after December 15, 2008. In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, ‘‘Noncontrolling Interests in Consolidated Financial Statements’’ (‘‘Statement 160’’). Statement 160 establishes accounting and reporting standards for the noncontrolling interest in a subsidiary, commonly referred to as minority interest. Among other matters, Statement 160 requires (a) the noncontrolling interest be reported within equity in the balance sheet and (b) the amount of consolidated net income attributable to the parent and to the noncontrolling interest to be clearly presented in the statement of income. Statement 160 is effective for fiscal years beginning after December 15, 2008. Statement 160 is to be applied prospectively, except for the presentation and disclosure requirements, which shall be F-57 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) applied retrospectively for all periods presented. Liberty expects that its adoption of Statement 160 in 2009 will impact the accounting for the purchase and sale and the presentation of the noncontrolling interests in its subsidiaries. (5) Supplemental Disclosures to Consolidated Statements of Cash Flows Years ended December 31, 2007 2006 2005 amounts in millions Cash paid for acquisitions: Fair value of assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net liabilities assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exchange of cost investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Common stock issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 365 1,494 1 (41) (227) — (4) (48) — 95 259 35 — (235) — (36) — (7) Cash paid for acquisitions, net of cash acquired . . . . . . . . . . . . . . . . . . . . . $ 348 1,207 96 Available-for-sale securities exchanged for consolidated subsidiaries and cash . . . $1,718 — — Cash paid for interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 607 Cash paid for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 195 510 152 477 161 (6) Discontinued Operations Sale of OpenTV Corp. On January 16, 2007, Liberty completed the sale of its controlling interest in OpenTV Corp. (‘‘OPTV’’) to an unaffiliated third party for cash consideration of $132 million, $20 million of which was deposited in an escrow account to fund potential indemnification claims by the third party made prior to the first anniversary of the closing. Pursuant to an agreement between Liberty and OPTV, $5.4 million of the amount received by Liberty at closing was remitted to OPTV, and OPTV received 71.4% of the escrow account in the first quarter of 2008. Liberty recognized a pre-tax gain of $65 million upon consummation of the sale. Such gain is included in earnings from discontinued operations in the accompanying consolidated statement of operations. OPTV was attributed to the Capital Group. Sale of Ascent Entertainment Group, Inc. On April 4, 2007, Liberty consummated a transaction with an unaffiliated third party pursuant to which Liberty sold its 100% ownership interest in Ascent Entertainment Group, Inc. (‘‘AEG’’) for $332 million in cash and 2.05 million shares of common stock of the buyer valued at approximately $50 million. Liberty recognized a pre-tax gain of $163 million upon consummation of the sale. Such gain is included in earnings from discontinued operations. AEG’s primary operating subsidiary is On Command Corporation. AEG was attributed to the Capital Group. F-58 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) Spin Off of Discovery Holding Company On July 21, 2005 (the ‘‘DHC Spin Off Date’’), Liberty completed the spin off (the ‘‘DHC Spin Off’’) of DHC to its shareholders. The DHC Spin Off was effected as a dividend by Liberty to holders of its Series A and Series B common stock of shares of DHC Series A and Series B common stock, respectively. The DHC Spin Off did not involve the payment of any consideration by the holders of Liberty common stock and is intended to qualify as a tax-free transaction. At the time of the DHC Spin Off, DHC’s assets were comprised of Liberty’s 100% ownership interest in Ascent Media Group, LLC, Liberty’s 50% ownership interest in Discovery Communications, Inc. and $200 million in cash. Following the DHC Spin Off, DHC and Liberty operate independently, and neither has any stock ownership, beneficial or otherwise, in the other. In connection with the DHC Spin Off, DHC and Liberty entered into certain agreements in order to govern certain of the ongoing relationships between Liberty and DHC after the DHC Spin Off and to provide for an orderly transition. These agreements include a Reorganization Agreement, a Facilities and Services Agreement and a Tax Sharing Agreement. The DHC Reorganization Agreement provides for, among other things, the principal corporate transactions required to effect the DHC Spin Off and cross indemnities. Pursuant to the DHC Facilities and Services Agreement, Liberty provides DHC with office space and certain general and administrative services including legal, tax, accounting, treasury and investor relations support. DHC reimburses Liberty for direct, out-of-pocket expenses incurred by Liberty in providing these services and for DHC’s allocable portion of facilities costs and costs associated with any shared services or personnel. Under the DHC Tax Sharing Agreement, Liberty generally is responsible for U.S. federal, state and local and foreign income taxes owing with respect to consolidated returns which include both Liberty and DHC. DHC is responsible for all other taxes with respect to returns which include DHC, but do not include Liberty whether accruing before, on or after the DHC Spin Off. The DHC Tax Sharing Agreement requires that DHC will not take, or fail to take, any action where such action, or failure to act, would be inconsistent with or prohibit the DHC Spin Off from qualifying as a tax-free transaction. Moreover, DHC has indemnified Liberty for any loss resulting from such action or failure to act, if such action or failure to act precludes the DHC Spin Off from qualifying as a tax-free transaction. The consolidated financial statements and accompanying notes of Liberty have been prepared reflecting OPTV, AEG and DHC as discontinued operations. Accordingly, the assets and liabilities, revenue, costs and expenses, and cash flows of these subsidiaries have been excluded from the respective captions in the accompanying consolidated balance sheets, statements of operations, statements of comprehensive earnings (loss) and statements of cash flows and have been reported separately in such consolidated financial statements. F-59 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) Certain combined statement of operations information for OPTV, AEG and DHC, which is included in earnings (loss) from discontinued operations, is as follows: Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Earnings (loss) before income taxes and minority interests . . . . . . . . . . . . . . . . . . . Years ended December 31, 2007 2006 2005 amounts in millions 704 335 $ 59 (1) (30) $160 (7) Investments in Available-for-Sale Securities and Other Cost Investments Investments in AFS securities, which are recorded at their respective fair market values, and other cost investments are summarized as follows: December 31, 2007 2006 amounts in millions Capital Group News Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Time Warner Inc. (‘‘Time Warner’’)(1) . . . . . . . . . . . . . . . . . . . Sprint Nextel Corporation (‘‘Sprint’’)(2) . . . . . . . . . . . . . . . . . . Motorola, Inc. (‘‘Motorola’’)(3) . . . . . . . . . . . . . . . . . . . . . . . . Other AFS equity securities(4) . . . . . . . . . . . . . . . . . . . . . . . . Other AFS debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other cost investments and related receivables . . . . . . . . . . . . . $10,647 1,695 1,150 1,187 655 156 35 11,158 3,728 1,651 1,522 830 135 34 Total attributed Capital Group . . . . . . . . . . . . . . . . . . . . . 15,525 19,058 Interactive Group IAC/InterActiveCorp (‘‘IAC’’) . . . . . . . . . . . . . . . . . . . . . . . . . Other AFS securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total attributed Interactive Group . . . . . . . . . . . . . . . . . . . 1,863 181 2,044 2,572 — 2,572 Consolidated Liberty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . 17,569 — 21,630 (8) $17,569 21,622 (1) Includes $150 million and $198 million of shares pledged as collateral for share borrowing arrangements at December 31, 2007 and 2006, respectively. (2) Includes $118 million and $170 million of shares pledged as collateral for share borrowing arrangements at December 31, 2007 and 2006, respectively. (3) Includes $833 million and $1,068 million of shares pledged as collateral for share borrowing arrangements at December 31, 2007 and 2006, respectively. (4) Includes $82 million and $46 million of shares pledged as collateral for share borrowing arrangements at December 31, 2007 and 2006, respectively. F-60 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) Time Warner On May 17, 2007, Liberty completed a transaction (the ‘‘Time Warner Exchange’’) with Time Warner in which Liberty exchanged approximately 68.5 million shares of Time Warner common stock valued at $1,479 million for a subsidiary of Time Warner which holds ANLBC, Leisure Arts and $984 million in cash. Liberty recognized a pre-tax gain of $582 million based on the difference between the fair value and the weighted average cost basis of the Time Warner shares exchanged. CBS Corporation On April 16, 2007, Liberty completed a transaction (the ‘‘CBS Exchange’’) with CBS Corporation pursuant to which Liberty exchanged all of its 7.6 million shares of CBS Class B common stock valued at $239 million for a subsidiary of CBS that holds WFRV TV Station and approximately $170 million in cash. Liberty recognized a pre-tax gain of $31 million based on the difference between the fair value and the weighted average cost basis of the CBS shares exchanged. On a pro forma basis, the results of operations of ANLBC, Leisure Arts and WFRV TV Station are not significant to those of Liberty for the years ended December 31, 2007 and 2006. News Corporation Subsequent to December 31, 2007, Liberty completed the News Corporation Exchange pursuant to which it exchanged its approximate 16% ownership interest in News Corporation valued at approximately $10.1 billion on the closing date for a subsidiary of News Corporation, which owns News Corporation’s approximate 41% interest in The DIRECTV Group, Inc., three regional sports television networks and approximately $465 million in cash. IAC/InterActiveCorp Effective August 9, 2005, IAC completed the spin-off of its subsidiary, Expedia, Inc. (‘‘Expedia’’). Each share of IAC common stock and IAC Class B common stock owned at the time of the spin-off, including those owned by Liberty, was recapitalized as 1/2 of a share of the same class of IAC common stock and 1/2 of a share of the corresponding class of Expedia common stock. Immediately subsequent to the spin-off of Expedia, Liberty owned approximately 20% of the outstanding Expedia common stock representing an approximate 52% voting interest. However, under governance arrangements between Liberty and Mr. Barry Diller, the Chairman of Expedia, entered into in connection with the Expedia spin-off Mr. Diller voted Liberty’s shares of Expedia, subject to certain limitations. As Liberty has the right to and has appointed 20% of the members of Expedia’s board of directors, which is currently comprised of 10 members, Liberty accounts for this investment using the equity method of accounting. Liberty allocated its pre-spin off carrying value in IAC between IAC and Expedia based on the relative trading prices of IAC and Expedia. Unrealized holding gains included in the carrying value allocated to Expedia were reversed as part of this allocation. At December 31, 2007, Liberty owned approximately 25% of IAC common stock representing an approximate 59% voting interest. However, under governance arrangements existing at December 31, 2007, Mr. Barry Diller, the Chairman of IAC, voted Liberty’s shares, subject to certain limitations. Due to this and the fact that Liberty had rights to appoint only two of the twelve members of the IAC board of directors, Liberty’s ability to exert significant influence over IAC was limited. Accordingly, Liberty accounted for this investment as an AFS security. F-61 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) Subsequent to December 31, 2007, Liberty increased its ownership interest in IAC to an approximate 30% equity interest and a 62% voting interest. On January 22, 2008, IAC and Mr. Diller filed a complaint styled IAC/InteractiveCorp, et al. v. Liberty Media Corporation, C.A. No. 3486 in the Delaware Chancery Court seeking a declaratory judgment that, among other things, a proposed spin off transaction by IAC and Mr. Diller’s actions in respect thereof do not breach the foregoing governance arrangements. On January 24, 2008, we filed a complaint styled Liberty Media Corporation, et al. v. Diller, et al., C.A. No. 3491 in the Delaware Chancery Court against IAC, Mr. Diller and certain other members of IAC’s board of directors seeking a judgment that, among other things, the proposed spin off transaction constitutes a violation of IAC’s charter and breaches the foregoing governance arrangements. As a result of Mr. Diller’s breach of these governance arrangements, his right to vote Liberty’s shares has terminated, and the record holders of a majority of the voting power in IAC have, among other things, (a) acted by written consent to remove Mr. Diller and certain other members of the IAC board and appoint three of Liberty’s officers to serve on the board of IAC, along with Liberty’s two existing designees and (b) filed a complaint styled LMC Silver King, Inc., et al. v. IAC/ InterActiveCorp, et al., C.A. No. 3501 in the Chancery Court seeking, among other things, a declaratory judgment that this written consent by those record holders was duly and validly executed and was effective upon delivery to IAC. The three actions referenced in this section have been consolidated by the court into an action styled In re IAC/InterActiveCorp C.A. No. 3486-VCL. Pursuant to a status-quo order entered by the Delaware Chancery Court, IAC is required to give Liberty advance notice of numerous actions and potential transactions, and the persons serving as directors of IAC prior to the delivery of the IAC majority stockholders’ written consent will remain in office pending the outcome of the litigation. Liberty will continue to account for its investment in IAC as an AFS security pending the resolution of this litigation. Other Than Temporary Declines in Fair Value of Investments During the years ended December 31, 2007, 2006 and 2005, Liberty determined that certain of its AFS securities and cost investments experienced other than temporary 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 other than temporary declines in fair value of investments in the consolidated statements of operations. Unrealized Holdings Gains and Losses Unrealized holding gains and losses related to investments in AFS securities are summarized below. December 31, 2007 December 31, 2006 Equity securities Debt securities Equity securities Debt securities . . . . . . . . . . . . . . . . . . . . . . . Gross unrealized holding gains Gross unrealized holding losses . . . . . . . . . . . . . . . . . . . . . . . $6,249 $ — amounts in millions 9,335 (1) — (12) — — The aggregate fair value of securities with unrealized holding losses at December 31, 2007 was $131 million. None of these securities had unrealized losses for more than 12 continuous months. F-62 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (8) Investment in Special Purpose Entity In April 2007, Liberty and a third party financial institution (the ‘‘Financial Institution’’) jointly created a series of special purpose entities (the ‘‘Investment Fund’’). Pursuant to the terms of the Investment Fund, a Liberty subsidiary borrowed $750 million from the Financial Institution with the intent to invest such proceeds in a portfolio of selected debt and mezzanine-level instruments of companies in the telecommunications, media and technology sectors (the ‘‘Debt Securities’’). One of the special purpose entities in the Investment Fund (‘‘MFC’’) is a variable interest entity of which the Financial Institution has been deemed the primary beneficiary and thus its parent for consolidation purposes. Liberty contributed the borrowed funds to MFC in exchange for a mandatorily redeemable preferred stock interest. MFC subsequently invested the proceeds as an equity investment in another special purpose entity (‘‘LCAP Investments LLC’’) which will make and hold the investments in the Debt Securities. A Liberty subsidiary separately made a nominal investment in LCAP Investments LLC which allows it to serve as its Managing Member. LCAP Investments LLC is considered a variable interest entity of which Liberty is deemed the primary beneficiary as a result of various special profit and loss allocations set forth in the governing agreements. As a result, LCAP Investments LLC is treated as a consolidated subsidiary of Liberty. Liberty is required to post cash collateral for the benefit of the Financial Institution of up to 20% of the cost of the Debt Securities. The various accounting treatment determinations noted above for MFC and LCAP Investments LLC, as prescribed by FIN 46, ‘‘Consolidation of Variable Interest Entities,’’ and Statement of Financial Accounting Standards No. 150, ‘‘Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity,’’ and related interpretations, have resulted in Liberty recording a balance sheet gross-up of the elements in the Investment Fund. The cash balances and Debt Securities held by LCAP Investments LLC are consolidated with Liberty and included in restricted cash and available-for-sale securities, respectively. The $750 million of bank financing held by the Liberty subsidiary is included in Liberty’s consolidated debt balance. In addition, the preferred stock interest in MFC is presented separately as a long-term asset, and the equity interest held by MFC in LCAP Investments LLC is reflected as minority interest in Liberty’s condensed consolidated balance sheet. The structural form of the Investment Fund does not meet the GAAP requirements necessary to offset, net or otherwise eliminate the gross-up of balance sheet accounts. The amount of restricted cash in the Investment Fund at December 31, 2007 is $692 million and is reflected in other long-term assets in Liberty’s consolidated balance sheet. Subsequent to December 31, 2007 and as a result of the occurrence of certain triggering events contained in the terms of the Investment Fund, a portion of the Investment Fund structure was unwound, and MFC was liquidated. Accordingly, Liberty’s preferred stock investment in MFC and the minority interest in LCAP Investments LLC were eliminated in equal amounts in the first quarter of 2008. (9) Financial Instruments Equity Collars and Put Options The Company has entered into equity collars, written put and call 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 at a specified date in the future. Equity collars also provide the counterparty with a call option that gives the counterparty the F-63 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) right to purchase the same securities at a specified price at a specified date in the future. The put option and the call option generally have equal fair values at the time of origination resulting in no cash receipts or payments. Borrowed Shares From time to time and in connection with certain of its derivative instruments, Liberty borrows shares of the underlying securities from a counterparty and delivers these borrowed shares in settlement of maturing derivative positions. In these transactions, a similar number of shares that are owned by Liberty have been posted as collateral with the counterparty. These share borrowing arrangements can be terminated at any time at Liberty’s option by delivering shares to the counterparty. The counterparty can terminate these arrangements at any time. The liability under these share borrowing arrangements is marked to market each reporting period with changes in value recorded in unrealized gains or losses in the consolidated statement of operations. The recorded amount of this liability as of December 31, 2007 and 2006 was $1,183 million and $1,482 million, respectively, and is included in other current liabilities in the accompanying consolidated balance sheets. The shares posted as collateral under these arrangements continue to be treated as AFS securities and are marked to market each reporting period with changes in value recorded as unrealized gains or losses in other comprehensive earnings. 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 and Embarq Corporation common stock, Motorola common stock, Viacom Class B and CBS Corporation Class B common stock or Time Warner common stock, as applicable. (See note 11 for a more complete description of the exchangeable debentures and the related accounting treatment.) Realized and Unrealized Gains (Losses) on Financial Instruments Realized and unrealized gains (losses) on financial instruments are comprised of changes in the fair value of the following: Senior exchangeable debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity collars . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Borrowed shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exchangeable debenture call option obligations . . . . . . . . . . . . . . . . . . . . . . . . . Other derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Years ended December 31, 2007 2006 2005 amounts in millions — $ 541 (59) 527 298 (32) — (353) 165 (97) — 311 (205) 172 (21) $1,269 (279) 257 (10) Investments in Affiliates Accounted for Using the Equity Method Liberty’s most significant equity method investment is Expedia in which it has an approximate 24% economic interest as of December 31, 2007 and which had a carrying value of $1,301 million and $1,254 million as of December 31, 2007 and 2006, respectively. The fair value of the Company’s F-64 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) investment in Expedia was $2,189 million and $1,452 million at December 31, 2007 and 2006, respectively. Summarized unaudited financial information for Expedia is as follows: Expedia Consolidated Balance Sheets Current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 31, 2007 2006 amounts in millions 1,178 $1,046 137 179 5,861 6,006 1,029 971 59 93 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $8,295 Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities Minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,774 351 1,085 205 62 4,818 Total liabilities and equity . . . . . . . . . . . . . . . . . . . . . . . . . . . $8,295 8,264 1,402 362 500 34 62 5,904 8,264 Expedia Consolidated Statements of Operations Years ended December 31, 2007 2006 2005 Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . amounts in millions 2,238 (503) $ 2,665 (562) 2,119 (480) Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Selling, general and administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,103 (1,496) (78) 1,735 (1,273) (111) 1,639 (1,116) (126) Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other income (expense) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 529 (53) 39 (16) (203) Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 296 351 (17) 32 18 (139) 245 397 (2) 51 (31) (186) 229 F-65 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (11) Long-Term Debt Debt is summarized as follows: Outstanding principal December 31, 2007 Carrying value December 31, 2007 2006 amounts in millions Capital Group Senior exchangeable debentures 0.75% Senior Exchangeable Debentures due 2023 . . . . . . . . . . . . . 4% Senior Exchangeable Debentures due 2029 . . . . . . . . . . . . . . . 3.75% Senior Exchangeable Debentures due 2030 . . . . . . . . . . . . . 3.5% Senior Exchangeable Debentures due 2031 . . . . . . . . . . . . . . 3.25% Senior Exchangeable Debentures due 2031 . . . . . . . . . . . . . Liberty bank facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Subsidiary debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,750 869 810 501 551 750 98 1,820 556 463 432 419 750 98 1,637 254 234 238 119 — 158 Total attributed Capital Group debt . . . . . . . . . . . . . . . . . . . . . . . 5,329 4,538 2,640 Interactive Group Senior notes and debentures 7.875% Senior Notes due 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.75% Senior Notes due 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.7% Senior Notes due 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.5% Senior Debentures due 2029 . . . . . . . . . . . . . . . . . . . . . . . . 8.25% Senior Debentures due 2030 . . . . . . . . . . . . . . . . . . . . . . . . QVC bank credit facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other subsidiary debt Total attributed Interactive Group debt . . . . . . . . . . . . . . . . . . . . . 670 233 803 500 902 4,023 61 7,192 668 234 801 495 895 4,023 61 667 234 800 495 895 3,225 67 7,177 6,383 Total consolidated Liberty debt . . . . . . . . . . . . . . . . . . . . . . . . . . . $12,521 11,715 9,023 Less current maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (191) (114) $11,524 8,909 Senior Notes and Debentures Interest on the Senior Notes and Senior Debentures is payable semi-annually based on the date of issuance. The Senior Notes and Senior Debentures are stated net of an aggregate unamortized discount of $15 million and $17 million at December 31, 2007 and 2006, respectively. Such discount is being amortized to interest expense in the accompanying consolidated statements of operations. Senior Exchangeable Debentures Each $1,000 debenture of Liberty’s 0.75% Senior Exchangeable Debentures 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 common stock F-66 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) 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 equal to the face amount of the debentures plus accrued interest. 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 common stock, or any combination thereof. The holders of Liberty’s 0.75% Senior Exchangeable Debentures due 2023, which have an aggregate principal amount of approximately $1.75 billion, have the right to put such debentures to Liberty at 100% of par during the period from February 25, 2008 to March 24, 2008 for payment on March 31, 2008. Subsequent to December 31, 2007, Liberty notified its bondholders that it will pay cash for any debentures that are validly tendered pursuant to the put right. Liberty intends to fund the cash purchase price with committed funds obtained from financing involving certain of its equity derivatives. Each $1,000 debenture of Liberty’s 4% Senior Exchangeable Debentures is exchangeable at the holder’s option for the value of 11.4743 shares of Sprint common stock and .5737 shares of Embarq Corporation (‘‘Embarq’’), which Sprint spun off to its shareholders in May 2006. Liberty may, at its election, pay the exchange value in cash, Sprint and Embarq common stock or a combination thereof. Liberty, at its option, may redeem the debentures, in whole or in part, for cash generally equal to the face amount of the debentures plus accrued interest. Each $1,000 debenture of Liberty’s 3.75% Senior Exchangeable Debentures is exchangeable at the holder’s option for the value of 8.3882 shares of Sprint common stock and .4194 shares of Embarq common stock. Liberty may, at its election, pay the exchange value in cash, Sprint and Embarq common stock or a combination thereof. Liberty, at its option, may redeem the debentures, in whole or in part, for cash equal to the face amount of the debentures plus accrued interest. Each $1,000 debenture of Liberty’s 3.5% Senior Exchangeable Debentures (the ‘‘Motorola Exchangeables’’) is exchangeable at the holder’s option for the value of 36.8189 shares of Motorola common stock and, prior to the cash distribution described below, 4.0654 shares of Freescale Semiconductor, Inc. (‘‘Freescale’’), which Motorola spun off to its shareholders in December 2004. Such exchange value is payable, at Liberty’s option, in cash, Motorola stock or a combination thereof. Liberty, at its option, may redeem the debentures, in whole or in part, for cash generally equal to the adjusted principal amount of the debentures plus accrued interest. As a result of the cash distribution described below, the adjusted principal amount of each $1,000 debenture is $837.38. Effective December 1, 2006, a consortium of private equity firms purchased all of the common stock of Freescale, including the Freescale common stock owned by Liberty. Pursuant to the terms of the indenture covering the Motorola Exchangeables, Liberty announced that it would make a cash distribution of $162.62 per $1,000 bond to holders of such bonds. Such distribution was made in January 2007, and Liberty reduced its outstanding debt by $97.6 million. Each $1,000 debenture of Liberty’s 3.25% Senior Exchangeable Debentures is exchangeable at the holder’s option for the value of 9.2833 shares of Viacom Class B common stock and 9.2833 shares of CBS Corporation (‘‘CBS’’) Class B common stock, which Viacom spun off to its shareholders in December 2005. Such exchange value is payable at Liberty’s option in cash, Viacom and CBS stock or a combination thereof. Liberty, at its option, may redeem the debentures, in whole or in part, for cash equal to the face amount of the debentures plus accrued interest. 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. F-67 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) Liberty Bank Facility Represents borrowings related to the Investment Fund described in note 8 above. Borrowings accrue interest at a rate of LIBOR plus an applicable margin (5.43% at December 31, 2007). QVC Bank Credit Facilities QVC is party to an unsecured $3.5 billion bank credit facility dated March 3, 2006 (the ‘‘March 2006 Credit Agreement’’). The March 2006 Credit Agreement is comprised of two $800 million U.S. dollar term loans, a $600 million multi-currency term loan that was drawn in U.S. dollars, a $650 million U.S. dollar revolving loan and a $650 million multi-currency revolving loan. The foregoing multi-currency loans can be made, at QVC’s option, in U.S. dollars, Japanese yen, U.K. pound sterling or euros. All loans are due and payable on March 3, 2011. QVC is party to a second credit agreement dated October 4, 2006, as amended on March 20, 2007 (the ‘‘October 2006 Credit Agreement’’), which provides for an additional unsecured $1.75 billion credit facility, consisting of an $800 million initial term loan and $950 million of delayed draw term loans, all of which has been drawn. The loans are scheduled to mature on October 4, 2011. All loans under the March 2006 Credit Agreement and the October 2006 Credit Agreement bear interest at a rate equal to (i) LIBOR for the interest period selected by QVC plus a margin that varies based on QVC’s leverage ratio or (ii) the higher of the Federal Funds Rate plus 0.50% or the prime rate announced by the respective Administrative Agent from time to time. The weighted average interest rate for all borrowings under QVC’s Credit Agreements at December 31, 2007 was 5.65%. QVC is required to pay a commitment fee quarterly in arrears on the unused portion of the commitments. Such fees were not significant in 2007 or 2006. The March 2006 Credit Agreement and the October 2006 Credit Agreement contain restrictive covenants, which require among other things, the maintenance of certain financial ratios and include limitations on indebtedness, liens, encumbrances, dispositions, guarantees and dividends. QVC was in compliance with its debt covenants at December 31, 2007. QVC’s ability to borrow the unused portion of its credit agreements is dependent on its continuing compliance with such covenants both before and after giving effect to such additional borrowing. QVC Interest Rate Swap Arrangements QVC is party to ten separate interest rate swap arrangements with an aggregate notional amount of $2,200 million to manage the cash flow risk associated with interest payments on its variable rate debt. The swap arrangements provide for QVC to make fixed payments at rates ranging from 4.9575% to 5.2928% and to receive variable payments at 3 month LIBOR. All of the swap arrangements expire in March 2011 contemporaneously with the maturity of the March 2006 Credit Agreement. QVC is also party to an interest rate swap arrangement with a notional amount of $500 million. This swap arrangement, which expires in September 2008, provides for QVC to make fixed payments at 4.76% and to receive variable payments at 3 month LIBOR through March 18, 2008. Thereafter, QVC is to make fixed payments at 4.71% and to receive variable payments at 1 month LIBOR. Liberty accounts for the swap arrangements as cash flow hedges with the effective portions of changes in the fair value reflected in other comprehensive earnings in the accompanying consolidated balance sheet. F-68 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) Other Subsidiary Debt Other subsidiary debt at December 31, 2007 is comprised of capitalized satellite transponder lease obligations and bank debt of certain subsidiaries. Five Year Maturities The U.S. dollar equivalent of the annual principal maturities of Liberty’s debt for each of the next five years is as follows (amounts in millions): 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 $ $ 923 $ 20 $4,048 $ 762 The foregoing principal maturities for 2008 do not include any amounts for Liberty’s 0.75% Senior Exchangeable Debentures that may be put to the Company in March 2008. 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 is as follows: Fixed rate senior notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Senior debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Senior exchangeable debentures, including call option obligation . . . $1,655 $1,323 $3,690 1,678 1,422 4,361 Liberty believes that the carrying amount of its subsidiary debt, which is primarily variable rate debt, approximated fair value at December 31, 2007. December 31, 2007 2006 amounts in millions F-69 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (12) Income Taxes Income tax benefit (expense) consists of: Years ended December 31, 2007 2006 2005 amounts in millions Current: Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . State and local . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (27) (81) (93) (513) (92) (112) (100) (75) (88) (201) (717) (263) Deferred: Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . State and local . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (152) 31 1 (120) 362 99 4 465 Income tax benefit (expense) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(321) (252) 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: 219 172 (2) 389 126 Computed expected tax benefit (expense) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Nontaxable exchange of investments for subsidiaries and cash . . . . . . . . . . . . . . . Change in estimated foreign and state tax rates . . . . . . . . . . . . . . . . . . . . . . . . . State and local income taxes, net of federal income taxes . . . . . . . . . . . . . . . . . . Foreign taxes, net of foreign tax credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in valuation allowance affecting tax expense . . . . . . . . . . . . . . . . . . . . . . Impairment of goodwill not deductible for tax purposes . . . . . . . . . . . . . . . . . . . . Disposition of nondeductible goodwill in sales transaction . . . . . . . . . . . . . . . . . . Minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dividends received deduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Disqualifying disposition of incentive stock options not deductible for book Years ended December 31, 2007 2006 2005 amounts in millions (336) 59 $(800) — — 541 147 130 (4) 7 (34) (35) (31) (20) (1) 76 (40) (9) (11) (39) — — (43) — (10) (10) (3) 12 12 12 purposes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other, net — (11) 14 — (18) (2) Income tax benefit (expense) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(321) (252) 126 F-70 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) The tax effects of temporary differences that give rise to significant portions of the deferred income tax assets and deferred income tax liabilities are presented below: December 31, 2007 2006 amounts in millions Deferred tax assets: Net operating and capital loss carryforwards . . . . . . . . . . . . . . . Accrued stock compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . Other accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other future deductible amounts . . . . . . . . . . . . . . . . . . . . . . . . $ 315 90 206 316 117 470 79 214 231 117 Deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,044 (63) 1,111 (47) Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 981 1,064 Deferred tax liabilities: Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Discount on exchangeable debentures . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,972 2,284 1,167 109 6,885 2,362 981 369 Deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,532 10,597 Net deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $8,551 9,533 The Company’s deferred tax assets and liabilities are reported in the accompanying consolidated balance sheets as follows: Current deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . Current deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . December 31, 2007 2006 amounts in millions (128) $ — — 93 9,661 8,458 Net deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . $8,551 9,533 The Company’s valuation allowance increased $16 million in 2007. Such increase is due to a $9 million increase that affected tax expense and a $7 million increase for acquisitions. At December 31, 2007, Liberty had net operating and capital loss carryforwards for income tax purposes aggregating approximately $652 million which, if not utilized to reduce taxable income in future periods, will expire as follows: 2009: $329 million; 2011: $110 million; 2012: $92 million and beyond 2012: $121 million. Of the foregoing net operating and capital loss carryforward amount, approximately $263 million is subject to certain limitations and may not be currently utilized. The remaining $389 million is currently available to be utilized to offset future taxable income of Liberty’s consolidated tax group. F-71 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) Since the date Liberty issued its exchangeable debentures, it has claimed interest deductions on such exchangeable debentures for federal income tax purposes based on the ‘‘comparable yield’’ at which it could have issued a fixed-rate debenture with similar terms and conditions. In all instances, this policy has resulted in Liberty claiming interest deductions significantly in excess of the cash interest currently paid on its exchangeable debentures. In this regard, Liberty has deducted $2,847 million in cumulative interest expense associated with the exchangeable debentures since the Company’s 2001 split off from AT&T Corp. (‘‘AT&T’’). Of that amount, $844 million represents cash interest payments. Interest deducted in prior years on its exchangeable debentures has contributed to net operating losses (‘‘NOLs’’) or offset taxable income earned in prior taxable years and is offsetting taxable income earned in the current year. In connection with the IRS’ examination of Liberty’s 2003 through 2007 tax returns, and consistent with the position espoused in the previously issued Technical Advice Memorandums to other taxpayers, the IRS notified Liberty during the third quarter of 2007 that it believed the interest expense on Liberty’s exchangeable debentures was not deductible for the period following Liberty’s split-off from AT&T. In February 2008, Liberty reached a settlement with the IRS, which stipulates that interest deductions claimed on a portion of the exchangeable debentures will be disallowed and instead will reduce Liberty’s gain on the future redemption or other retirement of such debt. The cumulative amount of interest deductions disallowed through December 31, 2007 under the settlement is $546 million. As a result, a portion of Liberty’s NOLs were eliminated and Liberty had net taxable income in 2006 and 2007. Consequently, Liberty expects to remit federal income tax payments in 2008 and beyond. Because the settlement was reached after December 31, 2007, its effects will not be reflected for financial statement purposes until the first quarter of 2008. Liberty does not expect there will be a material impact on its total tax expense as the resulting increase in current tax expense will be largely offset by a decrease in deferred tax expense. A reconciliation of unrecognized tax benefits is as follows (amounts in millions): Balance at January 1, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additions based on tax positions related to the current year . . . . . . . . . . . . Additions for tax positions of prior years . . . . . . . . . . . . . . . . . . . . . . . . . . Reductions for tax positions of prior years . . . . . . . . . . . . . . . . . . . . . . . . . Settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $422 45 9 (7) (7) Balance at December 31, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $462 As of December 31, 2007, the Company had recorded tax reserves of $462 million related to unrecognized tax benefits for uncertain tax positions. If such tax benefits were to be recognized for financial statement purposes, $447 million would be reflected in the Company’s tax expense and affect its effective tax rate. Liberty’s estimate of its unrecognized tax benefits related to uncertain tax positions requires a high degree of judgment. As of December 31, 2007, the Company’s 2001 and 2002 tax years are closed for federal income tax purposes, although tax loss carryforwards from those years are still subject to adjustment. The Company’s tax years 2003 through 2006 are under IRS examination, and its 2007 tax year is being examined currently as part of the IRS’s Compliance Assurance Process (‘‘CAP’’) program. In conjunction with the CAP program, the Company expects the IRS to complete its examination of the 2003 through 2007 tax years by the end of 2008. In January 2008, the Company was notified by the F-72 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) states of California and New York that they intend to audit the Company’s 2003 through 2005 tax years. The Company is currently under audit in the UK, Japan, and Germany. It is reasonably possible that the amount of the Company’s gross unrecognized tax benefits may decrease within the next twelve months by up to $55 million, due to the potential resolution of certain disputes with the taxing authorities and the expiration of various statutes of limitation. During the year ended December 31, 2007, the Company recognized $6 million and $3 million of interest and penalties, respectively, related to uncertain tax positions. As of December 31, 2007, the Company had recorded $27 million of accrued interest and penalties related to uncertain tax positions. (13) Stockholders’ Equity Preferred Stock Liberty’s preferred stock is issuable, from time to time, with such designations, preferences and relative participating, optional or other 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, 2007, no shares of preferred stock were issued. Common Stock Series A Liberty Capital common stock and Series A Liberty Interactive common stock each has one vote per share, and Series B Liberty Capital common stock and Series B Liberty Interactive common stock each 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 of the same group. The Series A and Series B common stock of each Group participate on an equal basis with respect to dividends and distributions of that Group. As of December 31, 2007, there were 2.8 million and 1.5 million shares of Series A and Series B Liberty Capital common stock, respectively, reserved for issuance under exercise privileges of outstanding stock options. As of December 31, 2007, there were 24.8 million and 7.5 million shares of Series A and Series B Liberty Interactive common stock, respectively, reserved for issuance under exercise privileges of outstanding stock options. In addition to the Series A and Series B Liberty Capital common stock and the Series A and Series B Liberty Interactive common stock, there are 300 million and 1,500 million shares of Series C Liberty Capital and Series C Liberty Interactive common stock, respectively, authorized for issuance. As of December 31, 2007, no shares of either Series C common stock were issued or outstanding. Prior to the Restructuring, the Company retired the 10,000,000 shares of Liberty Series B common stock held in treasury and returned them to the status of authorized and available for issuance. Purchases of Common Stock During the year ended December 31, 2007, the Company repurchased 36.9 million shares of Series A Liberty Interactive common stock in the open market for aggregate cash consideration of $740 million. F-73 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) In addition, Liberty completed a tender offer on June 12, 2007 pursuant to which it accepted for purchase 19,417,476 of Series A Liberty Interactive common stock at a price of $24.95 per share, or aggregate cash consideration of $484 million. During the period from May 10, 2006 to December 31, 2006, the Company repurchased 51.6 million shares of Series A Liberty Interactive common stock in the open market for aggregate cash consideration of $954 million. All of the foregoing shares were repurchased pursuant to a previously announced share repurchase program and have been retired and returned to the status of authorized and available for issuance. Liberty completed a tender offer on April 5, 2007, pursuant to which it accepted for purchase 11,540,680 shares of Series A Liberty Capital common stock at a price of $113.00 per share or aggregate cash consideration of $1,305 million (including transaction costs). During the year ended December 31, 2007, the Company sold put options on Series A Liberty Capital common stock for aggregate net cash proceeds of $20 million. As of December 31, 2007, put options with respect to approximately 1.6 million shares of Series A Liberty Capital common stock with a weighted average put price of $118.35 remained outstanding. Such put options expire on or before March 31, 2008. Liberty has also sold put options on Series A Liberty Interactive common stock for aggregate net cash proceeds of $14 million. As of December 31, 2007, put options with respect to approximately 8.8 million shares of Series A Liberty Interactive common stock with a weighted average put price of $20.34 remained outstanding. Such put options expire on or before March 31, 2008. The Company accounts for these put options pursuant to Statement of Financial Accounting Standards No. 150, ‘‘Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.’’ Accordingly, the put options are recorded in financial instrument liabilities at fair value, and changes in the fair value are included in realized and unrealized gains (losses) on financial instruments in the accompanying condensed consolidated statement of operations. During the period from May 10, 2006 to December 31 2006, the Company sold put options on Liberty Capital Series A common stock and Liberty Interactive Series A common stock for aggregate cash proceeds of approximately $7 million. All such put options expired out of the money prior to December 31, 2006. During 2005, Liberty sold put options with respect to shares of its Series A common stock for net cash proceeds of $2 million. All such puts expired out of the money in 2006. (14) Transactions with Officers and Directors Chairman’s Employment Agreement 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, 2007 is $2 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 ($129,192 per month as of December 31, 2007). Such payments would F-74 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) 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, 2007 is $31 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 Tele-Communications, Inc. (‘‘TCI’’). The Company assumed the obligation to pay that deferred compensation in connection with the TCI/AT&T Merger in 1999. The deferred obligation (together with interest at the rate of 13% per annum compounded annually), which aggregated $18 million at December 31, 2007 and is included in other liabilities in the accompanying consolidated balance sheets, 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. (15) Stock Options and Stock Appreciation Rights Liberty—Incentive Plans Pursuant to the Liberty Media Corporation 2000 Incentive Plan, as amended from time to time (the ‘‘2000 Liberty Incentive Plan’’), the Company has granted to certain of its employees stock options, SARs and stock options with tandem SARs (collectively, ‘‘Awards’’) to purchase shares of Series A and Series B Liberty Capital and Liberty Interactive common stock. The 2000 Liberty Incentive Plan provides for Awards to be made in respect of a maximum of 48 million shares of Liberty common stock. On May 1, 2007, shareholders of the Company approved the Liberty Media Corporation 2007 Incentive Plan, which provides for Awards to be made in respect of a maximum of 30 million shares of Liberty common stock. Liberty issues new shares upon exercise of equity awards. On December 17, 2002, shareholders of the Company approved the Liberty Media Corporation 2002 Nonemployee Director Incentive Plan, as amended from time to time (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. Liberty—Grants Awards granted pursuant to the Liberty Incentive Plan and the NDIP during 2005 through the Restructuring in 2006 are provided in the table below. The exercise prices in the table represent the F-75 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) exercise price on the date of grant and have not been adjusted for the effects of the DHC Spin Off or the Restructuring, as applicable. Grant year Series A Awards Grant group Grant type Number Weighted average exercise price of awards granted Vesting period Term 2005 . . . . . . . . . . . . Employees 2005 . . . . . . . . . . . . Non-employee directors SARs 2006 . . . . . . . . . . . . Employees 2006 . . . . . . . . . . . . Non-employee directors Options Options 9,076,750 $ 8.26 4 years 7 years 55,000 $10.36 1 year 10 years Options 2,473,275 $ 8.24 4 years 7 years 150,000 $ 8.70 1 year 10 years Weighted average grant date fair value $2.34 $4.50 $2.28 $2.74 Series B Awards 2005 . . . . . . . . . . . . Employees Options 1,800,000 $ 9.21 3 years 10 years $4.67 During the year ended December 31, 2007, Liberty granted 739,681 options to purchase shares of Series A Liberty Capital common stock and 6,093,384 shares of Series A Liberty Interactive common stock to certain of its directors, officers and employees and officers and employees of certain subsidiaries. Liberty used the Black-Scholes Model to estimate the grant date fair value of such options. The Series A Liberty Capital options and the Series A Liberty Interactive options granted in 2007 had a weighted average grant date fair value of $28.78 and $5.88, respectively. In 2006, subsequent to the Restructuring, Liberty granted 10,018,000 options to purchase Series A Liberty Interactive stock to officers and employees of certain of its subsidiaries. Such options had an estimated weighted average grant-date fair value of $4.94 per share. The Company has calculated the grant-date fair value for all of its equity classified awards and any subsequent remeasurement of its liability classified awards using the Black-Scholes Model. Prior to 2007, the Company calculated the expected term of the Awards using the methodology included in SEC Staff Accounting Bulletin No. 107. In 2007, the Company estimated the expected term of the Awards based on historical exercise and forfeiture data. The volatility used in the calculation for Awards granted in 2007 ranged from 20.8% to 25.3% for Liberty Interactive Awards and from 17.5% to 19.7% for Liberty Capital Awards and is based on the historical volatility of Liberty’s stocks and the implied volatility of publicly traded Liberty options. The Company uses a zero dividend rate and the risk-free rate for Treasury Bonds with a term similar to that of the subject options. F-76 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) Liberty—Outstanding Awards The following tables present the number and weighted average exercise price (‘‘WAEP’’) of certain options, SARs and options with tandem SARs to purchase Liberty common stock granted to certain officers, employees and directors of the Company. Liberty Capital common stock Liberty Interactive common stock Series A WAEP Series B WAEP Series A WAEP Series B WAEP Outstanding at January 1, 2007 . . . . . . . . . . Granted . . . . . . . . . . . . . . . . . . . . . . . . . Exercised . . . . . . . . . . . . . . . . . . . . . . . . Forfeited . . . . . . . . . . . . . . . . . . . . . . . . Repurchased . . . . . . . . . . . . . . . . . . . . . $ 93.24 2,318 740 $113.37 (255) $ 84.97 (16) $274.95 — numbers of options in thousands 1,498 — — — — $101.37 21,503 $19.71 6,093 $20.96 (1,594) $17.40 (681) $27.64 (510) $17.76 7,491 — — — — $23.41 Outstanding at December 31, 2007 . . . . . . . . 2,787 $ 97.21 1,498 $101.37 24,811 $19.97 7,491 $23.41 Exercisable at December 31, 2007 . . . . . . . . . 1,734 $ 95.49 1,468 $101.69 11,290 $21.05 7,341 $23.48 The following table provides additional information about outstanding options to purchase Liberty common stock at December 31, 2007. Series A Capital . . . . . . . . . . . . . . . Series B Capital . . . . . . . . . . . . . . . Series A Interactive . . . . . . . . . . . . . Series B Interactive . . . . . . . . . . . . . Liberty—Exercises options (000’s) 2,787 1,498 24,811 7,491 options $ 97.21 $101.37 $ 19.97 $ 23.41 No. of outstanding WAEP of outstanding remaining Weighted Aggregate intrinsic average value (000’s) life No. of exercisable WAEP of exercisable options options (000’s) 4.8 years 3.4 years 5.2 years 3.4 years $59,623 $23,335 $16,466 $ — 1,734 1,468 11,290 7,341 $ 95.49 $101.69 $ 21.05 $ 23.48 Aggregate intrinsic value (000’s) $41,768 $22,391 $ 6,745 $ — The aggregate intrinsic value of all options exercised during the years ended December 31, 2007, 2006 and 2005 was $16 million, $52 million and $109 million, respectively. Liberty—Restricted Stock The following table presents the number and weighted average grant-date fair value (‘‘WAFV’’) of unvested restricted shares of Liberty common stock held by certain officers and employees of the Company as of December 31, 2007 (numbers of shares in thousands). Series A Liberty Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Series A Liberty Interactive . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 222 Number of shares WAFV $104.68 $ 20.96 The aggregate fair value of all restricted shares of Liberty common stock that vested during the years ended December 31, 2007, 2006 and 2005 was $28 million, $30 million and $35 million, respectively. F-77 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) QVC Awards QVC had 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 was 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. If the eligible participant elected the SAR feature of the Tandem Plan, the participant received 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 was attached at the exercise date. QVC applied fixed plan accounting in accordance with APB Opinion No. 25. Under the Tandem Plan, option/SAR terms were ten years from the date of grant, with options/SARs generally becoming exercisable over four years from the date of grant. During the years ended December 31, 2006 and 2005, QVC received cash proceeds from the exercise of options aggregating $48 million and $46 million, respectively. In 2005, QVC also repurchased shares of common stock issued upon exercise of stock options in prior years. Cash payments aggregated $71 million for these repurchases. On August 14, 2006, QVC terminated the Tandem Plan and offered to exchange Liberty Interactive Share Units, as defined below, for all outstanding unvested QVC Awards as of September 30, 2006 (the ‘‘Exchange Offer’’). At the time of the Exchange Offer, there were 150,234 outstanding options to purchase QVC common stock. Of those outstanding options, 70,168 were vested and exercisable and 80,066 were unvested. Each holder of unvested QVC options who accepted the Exchange Offer received Liberty Interactive Share Units in an amount equal to the in-the-money value of the exchanged QVC options divided by the closing market price of Series A Liberty Interactive common stock on the trading day preceding commencement of the Exchange Offer. Liberty Interactive Share Units vest on the same vesting schedule as the unvested QVC Awards and represent the right to receive a cash payment equal to the value of Liberty Interactive common stock on the vesting date. All unvested QVC Awards were exchanged for approximately 2,348,000 Liberty Interactive Share Units. Liberty accounted for the Exchange Offer as a settlement of the outstanding unvested QVC Awards. The difference between the fair value of the Liberty Interactive Share Units and the fair value of unvested QVC Awards was reflected as a reduction to 2006 stock-based compensation. Also on August 14, 2006, a subsidiary of Liberty offered to purchase for cash all outstanding shares of QVC common stock owned by officers and employees of QVC and all vested QVC Awards (the ‘‘Tender Offer’’). Officers and employees of QVC owned 54,973 shares or 1.09% of QVC common stock at the time of the Tender Offer. The Exchange Offer and the Tender Offer both expired on September 30, 2006. All vested QVC Awards and 49,575 outstanding shares of QVC common stock were tendered as of September 30, 2006 resulting in cash payments aggregating approximately $258 million. The remaining 5,398 shares of QVC common stock were redeemed subsequent to September 30, 2006 for additional aggregate cash payments of approximately $17 million. Liberty accounted for the cash paid for outstanding shares of QVC common stock as the acquisition of a minority interest. The difference between the cash paid and the carrying value of the minority interest was allocated to intangible assets using a purchase accounting model. The cash paid for vested options was less than the carrying value of the related liability. Such difference was reflected as a reduction to 2006 stock-based compensation. The aggregate credit to stock-based compensation for the Exchange Offer and the Tender Offer was $24 million. Subsequent to the completion of the foregoing transactions, Liberty owns 100% of the equity of QVC. F-78 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) Starz Entertainment Starz Entertainment has outstanding Phantom Stock Appreciation Rights (‘‘PSARS’’) held by its former chief executive officer. Such PSARs are fully vested and expire on October 17, 2011, and Starz Entertainment has accrued $136 million as of December 31, 2007 related to the PSARs. Such amount is payable in cash, Liberty common stock or a combination thereof. Other Certain of the Company’s other 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. (16) 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 similar employee benefit plans. Employer cash contributions to all plans aggregated $26 million, $27 million and $22 million for the years ended December 31, 2007, 2006 and 2005, respectively. (17) 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: Foreign currency translation adjustments Unrealized holding gains (losses) on securities Discontinued operations amounts in millions Accumulated other comprehensive earnings (loss), net of taxes Balance at January 1, 2005 . . . . . . . . . . . . . . . . . Other comprehensive earnings (loss) . . . . . . . . Other activity . . . . . . . . . . . . . . . . . . . . . . . . . $(257) 307 — Balance at December 31, 2005 . . . . . . . . . . . . . . Other comprehensive earnings . . . . . . . . . . . . Balance at December 31, 2006 . . . . . . . . . . . . . . Other comprehensive earnings . . . . . . . . . . . . 50 111 161 107 Balance at December 31, 2007 . . . . . . . . . . . . . . $ 268 4,463 (1,101) — 3,362 2,420 5,782 (1,977) 3,805 21 (7) (5) 9 — 9 (9) — 4,227 (801) (5) 3,421 2,531 5,952 (1,879) 4,073 Included in Liberty’s accumulated other comprehensive earnings (loss) at January 1, 2005 was $123 million, net of income taxes, of foreign currency translation losses related to Cablevisi´on, S.A. F-79 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (‘‘Cablevisi´on’’), a former equity method investment of Liberty, and $186 million, net of income taxes, of foreign currency translation losses related to Telewest Global, Inc. (‘‘Telewest’’), another former equity method investment of Liberty. In the first quarter of 2005, Liberty disposed of its interests in Cablevisi´on and Telewest. Accordingly, Liberty recognized in its statement of operations $488 million of foreign currency translation losses (before income tax benefits) related to Cablevisi´on and Telewest that were previously included in accumulated other comprehensive earnings (loss). 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). Before-tax amount Tax (expense) benefit Net-of-tax amount amounts in millions Year ended December 31, 2007: Foreign currency translation adjustments . . . . . . . . . . . . . . . . . . . . . . . Unrealized holding losses on securities arising during period . . . . . . . . . Reclassification adjustment for holding gains realized in net earnings . . $ 172 (2,598) (605) (65) 987 230 Other comprehensive earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(3,031) 1,152 107 (1,611) (375) (1,879) Year ended December 31, 2006: Foreign currency translation adjustments . . . . . . . . . . . . . . . . . . . . . . . Unrealized holding gains on securities arising during period . . . . . . . . . Reclassification adjustment for holding gains realized in net loss . . . . . . $ 179 4,202 (298) (68) (1,597) 113 111 2,605 (185) Other comprehensive earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,083 (1,552) 2,531 Year ended December 31, 2005: Foreign currency translation adjustments . . . . . . . . . . . . . . . . . . . . . . . Reclassification adjustment for currency losses realized in net earnings . Unrealized holding losses on securities arising during period . . . . . . . . . Reclassification adjustment for holding gains realized in net earnings . . Reclass unrealized gain on AFS security . . . . . . . . . . . . . . . . . . . . . . . Discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (8) 503 (1,808) 350 (318) (11) Other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(1,292) 3 (191) 687 (133) 121 4 491 (5) 312 (1,121) 217 (197) (7) (801) (18) Transactions with Related Parties Starz Entertainment pays Revolution Studios (‘‘Revolution’’), an equity affiliate, fees for the rights to exhibit films produced by Revolution. Payments aggregated $58 million, $69 million and $84 million in 2007, 2006 and 2005, respectively. (19) Commitments and Contingencies Film Rights Starz Entertainment, 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 Entertainment has entered into agreements with a number of motion picture producers which obligate Starz Entertainment to pay fees (‘‘Programming Fees’’) for the rights to F-80 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) exhibit certain films that are released by these producers. The unpaid balance of Programming Fees for films that were available for exhibition by Starz Entertainment at December 31, 2007 is reflected as a liability in the accompanying consolidated balance sheet. The balance due as of December 31, 2007 is payable as follows: $99 million in 2008; $13 million in 2009; and $6 million thereafter. Starz Entertainment has also contracted to pay Programming Fees for films that have been released theatrically, but are not available for exhibition by Starz Entertainment until some future date. These amounts have not been accrued at December 31, 2007. Starz Entertainment’s estimate of amounts payable under these agreements is as follows: $482 million in 2008; $158 million in 2009; $102 million in 2010; $101 million in 2011; $94 million in 2012 and $178 million thereafter. In addition, Starz Entertainment is also obligated to pay Programming Fees for all qualifying films that are released theatrically in the United States by studios owned by The Walt Disney Company through 2012 and all qualifying films that are released theatrically in the United States by studios owned by Sony Pictures Entertainment (‘‘Sony’’) through 2013. Films are generally available to Starz Entertainment for exhibition 10-12 months after their theatrical release. The Programming Fees to be paid by Starz Entertainment are based on the quantity and the domestic theatrical exhibition receipts of qualifying films. As these films have not yet been released in theatres, Starz Entertainment is unable to estimate the amounts to be paid under these output agreements. However, such amounts are expected to be significant. In connection with an option exercised by Sony to extend the Sony contract through 2013, Starz Entertainment has agreed to pay Sony a total of $190 million in four annual installments of $47.5 million beginning in 2011. Starz Entertainment’s payments to Sony will be amortized ratably as programming expense over the three-year period beginning in 2012. Guarantees Liberty guarantees Starz Entertainment’s obligations under certain of its studio output agreements. At December 31, 2007, Liberty’s guarantees for obligations for films released by such date aggregated $793 million. While the guarantee amount for films not yet released is not determinable, such amount is expected to be significant. As noted above, Starz Entertainment has recognized the liability for a portion of its obligations under the output agreements. As this represents a commitment of Starz Entertainment, a consolidated subsidiary of Liberty, Liberty has not recorded a separate liability for its guarantee of these obligations. 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. Employment Contracts The Atlanta Braves and certain of their players and coaches have entered into long-term employment contracts whereby such individuals’ compensation is guaranteed. Amounts due under F-81 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) guaranteed contracts as of December 31, 2007 aggregated $125 million, which is payable as follows: $63 million in 2008, $31 million in 2009 and $31 million thereafter. In addition to the foregoing amounts, certain players and coaches may earn incentive compensation under the terms of their employment contracts. Operating Leases Liberty leases business offices, has entered into satellite transponder lease agreements and uses certain equipment under lease arrangements. Rental expense under such arrangements amounted to $45 million, $32 million and $33 million for the years ended December 31, 2007, 2006 and 2005, respectively. A summary of future minimum lease payments under noncancelable operating leases as of December 31, 2007 follows (amounts in millions): Years ending December 31: 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $37 $33 $28 $21 $13 $38 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 lease commitments will not be less than the amount shown for 2007. 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. Other 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’’). Pursuant to the AT&T Tax Sharing Agreement and in connection with Liberty’s split off from AT&T in 2001, AT&T was required to pay Liberty an amount equal to 35% of the amount of the net operating losses reflected in TCI’s final federal income tax return (‘‘TCI NOLs’’) that had not been used as an offset to Liberty’s obligations under the AT&T Tax Sharing Agreement and that had been, or were reasonably expected to be, utilized by AT&T. In connection with the split off, Liberty received an $803 million payment for TCI’s NOLs and recorded such payment as an increase to additional paid-in capital. Liberty was not paid for certain of TCI’s NOLs (‘‘SRLY NOLs’’) due to limitations and uncertainty regarding AT&T’s ability to use them to offset taxable income in the future. In the event AT&T was ultimately able to use any of the SRLY NOLs, they would be required to pay Liberty 35% of the amount of the SRLY NOLs used. F-82 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) In the fourth quarter of 2004, AT&T requested a refund from Liberty of $70 million, plus accrued interest, relating to losses that it generated in 2002 and 2003 and was able to carry back to offset taxable income previously offset by Liberty’s losses. AT&T has asserted that Liberty’s losses caused AT&T to pay $70 million in alternative minimum tax (‘‘AMT’’) that it would not have been otherwise required to pay had Liberty’s losses not been included in its return. In the fourth quarter of 2005, AT&T requested an additional $21 million relating to additional losses it generated and was able to carry back to offset taxable income previously offset by Liberty’s losses. Liberty has accrued approximately $70 million representing its estimate of the amount it may ultimately pay (excluding accrued interest, if any) to AT&T as a result of these requests. Although Liberty has not reduced its accrual for any future refunds, Liberty believes it is entitled to a refund when AT&T is able to realize a benefit in the form of a credit for the AMT previously paid. Although for accounting purposes Liberty has accrued a portion of the amounts claimed by AT&T to be owed by Liberty under the AT&T Tax Sharing Agreement, Liberty believes there are valid defenses or set-off or similar rights in its favor that may cause the total amount that it owes AT&T to be less than the amounts accrued; and under certain interpretations of the AT&T Tax Sharing Agreement, Liberty may be entitled to further reimbursements from AT&T. (20) 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 video and on-line commerce, media, communications and entertainment industries. Upon completion of the Restructuring and the issuance of its tracking stocks, Liberty attributed each of its businesses to one of two groups: the Interactive Group and the Capital Group. Each of the businesses in the tracking stock groups is separately managed. Liberty identifies its reportable segments as (A) those consolidated subsidiaries that represent 10% or more of its consolidated revenue, earnings before income taxes or total assets and (B) those equity method affiliates whose share of earnings represent 10% or more of Liberty’s pre-tax earnings. 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 operating segments based on financial measures such as revenue, operating cash flow, gross margin, average sales price per unit, number of units shipped and revenue or sales per customer equivalent. Liberty defines operating cash flow as revenue less cost of sales, operating expenses, and selling, general and administrative expenses (excluding stock-based compensation). Liberty believes this is an important indicator of the operational strength and performance of its businesses, including each business’s ability to service debt and fund capital expenditures. In addition, this measure allows management to view operating results and perform analytical comparisons and benchmarking between businesses and identify strategies to improve performance. This measure of performance excludes depreciation and amortization, stock-based compensation, litigation settlements and restructuring and impairment charges that are included in the measurement of operating income pursuant to GAAP. Accordingly, operating cash flow should be considered in addition to, but not as a substitute for, operating income, net income, cash flow provided by operating activities and other measures of financial performance prepared in accordance with GAAP. Liberty generally accounts for intersegment sales and transfers as if the sales or transfers were to third parties, that is, at current prices. F-83 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) For the year ended December 31, 2007, Liberty has identified the following consolidated subsidiaries as its reportable segments: (cid:127) QVC—consolidated subsidiary included in the Interactive Group that markets and sells a wide variety of consumer products in the United States 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. (cid:127) Starz Entertainment—consolidated subsidiary included in the Capital Group that provides premium programming distributed by cable operators, direct-to-home satellite providers, other distributors and via the Internet throughout the United States. (cid:127) Starz Media—consolidated subsidiary included in the Capital Group that develops, acquires, produces and distributes live-action and animated films and television productions for the home video, film, broadcast and direct-to-consumer markets. 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. Performance Measures Years ended December 31, 2007 2006 2005 Operating cash flow Revenue Operating cash flow Revenue Operating cash flow Revenue amounts in millions Interactive Group QVC . . . . . . . . . . . . . . . . . . . . . . . . . . Corporate and other . . . . . . . . . . . . . . . Capital Group Starz Entertainment . . . . . . . . . . . . . . . Starz Media . . . . . . . . . . . . . . . . . . . . . Corporate and other . . . . . . . . . . . . . . . $7,397 405 7,802 1,652 32 1,684 1,066 254 301 1,621 264 (143) (76) 45 Consolidated Liberty . . . . . . . . . . . . . . . $9,423 1,729 7,074 252 7,326 1,033 86 168 1,287 8,613 1,656 24 1,680 186 (24) (59) 103 1,783 6,501 — 6,501 1,004 — 141 1,145 7,646 1,422 (5) 1,417 171 — (47) 124 1,541 F-84 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) Other Information 2007 Investments in affiliates Total assets December 31, Capital expenditures Total assets amounts in millions 2006 Investments in affiliates Capital expenditures Interactive Group QVC . . . . . . . . . . . . . . . . . . . . Corporate and other . . . . . . . . Intragroup eliminations . . . . . . Capital Group Starz Entertainment . . . . . . . . . Starz Media . . . . . . . . . . . . . . . Corporate and other . . . . . . . . Assets of discontinued operations . . . . . . . . . . . . . . $20,620 5,430 (6,724) 19,326 — 1,311 — 1,311 2,773 661 23,053 — 26,487 — — 506 — 506 — 276 13 — 289 10 5 12 — 27 — 19,100 5,661 (4,941) 19,820 2,825 708 23,804 512 27,849 (31) 104 1,254 — 1,358 — — 484 — 484 — 254 5 — 259 7 2 10 — 19 — Intergroup eliminations . . . . . . (164) Consolidated Liberty . . . . . . . . $45,649 1,817 316 47,638 1,842 278 The following table provides a reconciliation of segment operating cash flow to earnings (loss) from continuing operations before income taxes and minority interest: Years ended December 31, 2007 2006 2005 Consolidated segment operating cash flow . . . . . . . . . . . . . . . . . . . . . . . . . . . Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Impairment of long-lived assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Realized and unrealized gains (losses) on derivative instruments, net . . . . . . . . Gains (losses) on dispositions, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other than temporary declines in fair value of investments . . . . . . . . . . . . . . . Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . amounts in millions 1,783 (67) (582) (113) (680) (279) 607 (4) 323 $1,729 (93) (675) (223) (641) 1,269 646 (33) 342 1,541 (52) (545) — (626) 257 (361) (449) 117 Earnings (loss) from continuing operations before income taxes and minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,321 988 (118) F-85 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) Revenue by Geographic Area Revenue by geographic area based on the location of customers is as follows: United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Germany . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other foreign countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Years ended December 31, 2007 2006 2005 amounts in millions 6,504 848 1,261 $7,183 870 1,370 5,784 781 1,081 Consolidated Liberty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $9,423 8,613 7,646 Long-lived Assets by Geographic Area United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Germany . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other foreign countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 803 263 285 678 119 349 Consolidated Liberty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,351 1,146 December 31, 2007 2006 amounts in millions F-86 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (21) Quarterly Financial Information (Unaudited) 1st 2nd 3rd 4th Quarter Quarter Quarter Quarter amounts in millions, except per share amounts 2007: Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,123 2,193 2,251 2,856 Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 249 Earnings from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . $ 327 Net earnings (loss): Series A and Series B Liberty Capital common stock . . . . . . . . . . . . $ 278 Series A and Series B Liberty Interactive common stock . . . . . . . . . . $ 91 Basic earnings (loss) from continuing operations per common share: Series A and Series B Liberty Capital common stock . . . . . . . . . . . . $ 1.68 Series A and Series B Liberty Interactive common stock . . . . . . . . . . $ .14 Diluted earnings (loss) from continuing operations per common share: Series A and Series B Liberty Capital common stock . . . . . . . . . . . . $ 1.68 Series A and Series B Liberty Interactive common stock . . . . . . . . . . $ .14 Basic net earnings (loss) per common share: Series A and Series B Liberty Capital common stock . . . . . . . . . . . . $ 1.98 Series A and Series B Liberty Interactive common stock . . . . . . . . . . $ .14 Diluted net earnings (loss) per common share: Series A and Series B Liberty Capital common stock . . . . . . . . . . . . $ 1.98 Series A and Series B Liberty Interactive common stock . . . . . . . . . . $ .14 227 902 907 102 6.11 .16 6.11 .16 6.92 .16 6.92 .16 199 319 241 78 1.87 .12 1.85 .12 1.87 .12 1.85 .12 63 417 247 170 1.91 .28 1.90 .28 1.91 .28 1.90 .28 2006: Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,901 2,025 2,016 2,671 Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 224 Earnings from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . $ 69 Net earnings (loss): Series A and Series B common stock . . . . . . . . . . . . . . . . . . . . . . . $ (26) Series A and Series B Liberty Capital common stock . . . . . . . . . . . . $ — Series A and Series B Liberty Interactive common stock . . . . . . . . . . $ — Basic and diluted earnings (loss) from continuing operations per common share: Series A and Series B common stock . . . . . . . . . . . . . . . . . . . . . . . $ .02 Series A and Series B Liberty Capital common stock . . . . . . . . . . . . $ — Series A and Series B Liberty Interactive common stock . . . . . . . . . . $ — Basic and diluted net earnings (loss) per common share: Series A and Series B common stock . . . . . . . . . . . . . . . . . . . . . . . $ (.01) Series A and Series B Liberty Capital common stock . . . . . . . . . . . . $ — Series A and Series B Liberty Interactive common stock . . . . . . . . . . $ — 257 482 120 269 89 .04 1.94 .13 .04 1.92 .13 236 63 — (51) 114 304 95 — 42 283 — — (.36) (1.34) .17 — (.36) .17 .43 — .30 .43 F-87 Board of Directors Officers CORPORATE DATA John C. Malone Chairman of the Board Gregory B. Maffei President and CEO Charles Y. Tanabe Executive Vice President and General Counsel Mark D. Carleton Senior Vice President William R. Fitzgerald Senior Vice President David J. A. Flowers Senior Vice President and Treasurer Albert E. Rosenthaler Senior Vice President Christopher W. Shean Senior Vice President and Controller Michael P. Zeisser Senior Vice President John C. Malone Chairman of the Board Liberty Media Corporation Robert R. Bennett Consultant and Retired President Liberty Media Corporation Donne F. Fisher President Fisher Capital Partners, Ltd. Paul A. Gould Managing Director Allen & Company LLC Gregory B. Maffei President and CEO Liberty Media Corporation David E. Rapley President Rapley Consulting, Inc. M. LaVoy Robison Executive Director The Anschutz Foundation Larry E. Romrell Retired Executive Vice President Tele-Communications, Inc. Executive Committee Paul A. Gould Gregory B. Maffei John C. Malone Compensation Committee Donne F. Fisher Paul A. Gould David E. Rapley M. LaVoy Robison Larry E. Romrell Audit Committee Donne F. Fisher Paul A. Gould David E. Rapley M. LaVoy Robison Nominating & Corporate Governance Committee: Donne F. Fisher Paul A. Gould David E. Rapley M. LaVoy Robison Larry E. Romrell Incentive Plan Committee: Donne F. Fisher Paul A. Gould Section 16 Exemption Committee: Donne F. Fisher Paul A. Gould Corporate Headquarters 12300 Liberty Boulevard Englewood, CO 80112 (720) 875-5400 Stock Information Liberty Entertainment Group Series A and B Common Stock (LMDIA/B), Liberty Interactive Group Series A and B Common Stock (LINTA/B), Liberty Capital Group Series A and Series B Common Stock (LCAPA/B) trade on NASDAQ CUSIP Numbers LMDIA—5307 1M 500 LMDIB—53071M 609 LINTA—5307 1M 104 LINTB—53071 M 20 3 LCAPA—53071M 30 2 LCAPB—53071 M 40 1 Transfer Agent Liberty Media Shareholder Services c/o Computershare P.O. Box 43023 Providence, RI 02940-3023 Phone: 781-575-4593 Toll free: 866-367-6355 www.computershare.com Telecommunication Device for the Deaf (TDD) 800-952-9245 Investor Relations John Orr Courtnee Ulrich Reggie Salazar reggie@libertymedia.com 877-772-1518 Liberty on the Internet Visit Liberty’s web site at www.libertymedia.com Financial Statements: Liberty Media Corporation financial statements are filed with the Securities and Exchange Commission. Copies of these financial statements can be obtained from the Transfer Agent or through Liberty’s web site. 27MAR200700380279 Liberty Media Corporation 12300 Liberty Boulevard Englewood, CO 80112 720.875.5400 www.libertymedia.com LM-AR-07