The DirecTV Group (DTV)

Note 2: Accounting Change and New Accounting Standard

Accounting Change—Share-Based Payments

        On January 1, 2006, we adopted Statement of Financial Accounting Standards, or SFAS, No. 123 (revised 2004), "Share-Based Payment," or SFAS No. 123R, which replaces SFAS No. 123, "Accounting for Stock-Based Compensation," and supersedes Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." The adoption of this standard did not have a significant impact on our consolidated results of operations or financial position, as the calculation of compensation costs under SFAS No. 123R is substantially similar to the calculation we applied under SFAS No. 123. However, as a result of the adoption of SFAS No 123R, beginning in the first quarter of 2006, we report the excess income tax benefit associated with the exercise of stock options or pay-out of restricted stock units as a cash flow from financing activities in our Consolidated Statements of Cash Flows.

        Under The DIRECTV Group, Inc. 2004 Stock Plan, or the 2004 Plan, as approved by our stockholders on June 2, 2004, shares, rights or options to acquire up to 21 million shares of common stock plus any awards cancelled, forfeited or expired from the former Hughes Electronics Corporation Incentive Plan, or the HEC Plan, on a cumulative basis were authorized for grant through March 16,

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2014, subject to Compensation Committee approval. We issue new shares of our common stock when restricted stock units are earned and when stock options are exercised.

Restricted Stock Units

        The Compensation Committee has granted restricted stock units under the 2004 Plan and the HEC Plan to certain of our employees and executives. Annual awards are mostly performance-based, with final payments in shares of our common stock. Final payment can be reduced from the target award amounts based on our company's performance over a three or four year performance period in comparison with pre-established targets. We record compensation expense for our restricted stock units on a straight-line basis over the service period of up to four years based upon the value of the award on the date approved, reduced for estimated forfeitures and adjusted for anticipated payout percentages related to the achievement of performance targets.

        Changes in the status of outstanding restricted stock units were as follows:

        The weighted average grant-date fair value of restricted stock units granted during the six months ended June 30, 2005 was $16.66.

        As of June 30, 2006, there was $65.4 million of unrecognized compensation expense related to unvested restricted stock units that we expect to recognize as follows: $22.0 million in the remainder of 2006, $31.4 million in 2007 and $12.0 million in 2008. The total fair value of restricted share units vested and distributed during the six month period ended June 30, 2006 was $17.8 million. The total fair value of restricted share units vested and distributed during the six month period ended June 30, 2005 was $23.6 million.

Stock Options

        The Compensation Committee has also granted stock options to acquire our common stock under the 2004 Plan and the HEC Plan to certain of our employees and executives. The exercise price of options granted is equal to at least 100% of the fair market value of the common stock on the date the options were granted. These nonqualified options generally vested over one to five years, expire ten years from date of grant and are subject to earlier termination under certain conditions. We record compensation expense for our stock options on a straight-line basis over the vesting period reduced for estimated forfeitures. All options granted to our employees were fully vested and fully expensed prior to December 31, 2005. No stock options were granted to our employees during 2006 or 2005.

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        Changes in the status of outstanding options during the six months ended June 30, 2006 were as follows:

        As of June 30, 2006, our outstanding stock options have an aggregate intrinsic value (market value less exercise price) of $51.0 million and a weighted average remaining contractual life of approximately 3.8 years. The total intrinsic value of options exercised was $24.7 million during the six months ended June 30, 2006 and $8.4 million during the six months ended June 30, 2005, based on the intrinsic value of individual awards on the date of exercise.

        We recorded share-based compensation expense, which includes compensation costs associated with restricted stock units and stock options, as applicable, of $10.8 million for the three months ended June 30, 2006 and $9.5 million for the three months ended June 30, 2005. We recorded share-based compensation expense of $22.0 million for the six months ended June 30, 2006 and $20.4 million for the six months ended June 30, 2005. We recognized tax benefits associated with share-based compensation expense of $4.1 million for the three months ended June 30, 2006, $3.6 million for the three months ended June 30, 2005, $8.4 million for the six months ended June 30, 2006 and $7.8 million for the six months ended June 30, 2005.

        We realized actual tax benefits for the deduction of share-based compensation expense of $5.1 million for the three months ended June 30, 2006 and $3.2 million for the three months ended June 30, 2005. We realized actual tax benefits for the deduction of share-based compensation expense of $16.2 million for the six months ended June 30, 2006 and $12.3 million for the six months ended June 30, 2005.

        We received proceeds from stock options exercised of $59.3 million for the six months ended June 30, 2006 and $15.3 million for the six months ended June 30, 2005.

New Accounting Standard

        In July 2006, the Financial Accounting Standards Board, or FASB, issued Interpretation No. 48, "Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109," or FIN 48. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in financial statements according to SFAS No. 109, "Accounting for Income Taxes." FIN 48 provides for the recognition of only those uncertain tax positions that are more-likely-than-not to be sustained upon examination, measured at the largest amount which has a greater than 50% likelihood of being realized upon settlement. Additionally, FIN 48 gives guidance on derecognition, classification, interest, penalties, accounting in interim periods and disclosure related to uncertain tax positions. The adoption of FIN 48 on January 1, 2007, as required, could result in an adjustment to the amount of recorded tax assets and liabilities related to uncertain tax positions by recording a corresponding adjustment to retained earnings in the Consolidated Balance Sheets. We are currently assessing the effect, if any, of FIN 48 on our consolidated results of operations and financial position.

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