The DirecTV Group (DTV)

Accounting and Tax Deductibility of the Elements of Compensation

        The primary elements of executive compensation (base salary, annual incentive bonus and stock awards) are generally considered taxable income to the executive and compensation expense to the Company when earned. However, under Section 401-K of the Code, which applies to the 401-K Plan, and Section 409A of the Code, which applies to the Excess Plan Savings Benefit and to the Executive Deferred Compensation Plan, executive and Company contributions to the three savings plans are not treated as current income to the executive and the related income taxes are deferred until the amounts are paid out to the executive, typically upon termination of employment. Further, for tax purposes, the Company defers recognition of the compensation expense for the executives' contributions to these plans until payout. We record compensation expense for restricted stock units and stock options on a straight-line basis over the service period of up to four years based upon the fair value of the award on the date approved, and adjusted for anticipated payout percentages related to the achievement of performance targets following Statement of Financial Accounting Standards No. 123 (revised 2004), "Share-Based Payment," or SFAS No. 123R.

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        In compensation recommendations to the Committee, we consider the potential impact of Section 162(m) of the Code on compensation decisions. Section 162(m) disallows a tax deduction by the Company for individual executive compensation exceeding $1 million in any taxable year for each of the Chief Executive Officer and the other four highest compensated senior executive officers, other than compensation that is performance-based under a plan that is approved by the stockholders of the Company and that meets certain other technical requirements. The annual incentive bonus and RSU programs are intended to meet the performance-based compensation requirements, while base salary and perquisites do not. Based on these requirements, the Company has determined that it is entitled to a tax deduction for compensation paid to executive officers during 2006, other than the base salary and perquisites for Messrs. Carey and Churchill in excess of $1 million each.

        While certain elements of executive compensation are designed to achieve favorable accounting and to preserve deductibility, we believe that stockholder interests are best served by not restricting flexibility in designing compensation programs, even though such programs may result in certain non-deductible compensation expenses. Accordingly, compensation arrangements for certain officers that are not fully deductible have been recommended to the Committee from time to time, and may be recommended in the future. Further, because of ambiguities and uncertainties as to the application and interpretation of Section 162(m), no assurance can be given, notwithstanding the Company's efforts, that compensation intended to satisfy the requirements for deductibility does, in fact, do so.