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

FORM 10-K

ýANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 20072008


OR

o

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

For the transition period from                                    to                                   

Commission File Number 000-51990001-33982

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

State of Delaware 84-1288730
(State or other jurisdiction of
incorporation or organization)		 (I.R.S. Employer
Identification No.)


 
 
12300 Liberty Boulevard
Englewood, Colorado		 80112
(Address of principal executive offices) (Zip Code)

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

Securities registered pursuant to Section 12(b) of the Act:

Title of each class
 Name of exchange on which registered
Series A Liberty Capital Common Stock, par value $.01 per share The Nasdaq Global SelectStock Market LLC
Series B Liberty Capital Common Stock, par value $.01 per share The Nasdaq Global SelectStock Market LLC
Series A Liberty Interactive Common Stock, par value $.01 per share The Nasdaq Global SelectStock Market LLC
Series B Liberty Interactive Common Stock, par value $.01 per share The Nasdaq Global SelectStock Market LLC
Series A Liberty Entertainment Common Stock, par value $.01 per shareThe Nasdaq Stock Market LLC
Series B Liberty Entertainment Common Stock, par value $.01 per shareThe Nasdaq Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act:None

          Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý    No o

          Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o    No ý

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

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

          Indicate by check mark whether the registrantRegistrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer ý Accelerated filer o Non-accelerated filer o
(Do not check if a smaller reporting company)		 Smaller reporting company o

          Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes oNo ý

          The aggregate market value of the voting stock held by nonaffiliates of Liberty Media Corporation computed by reference to the last sales price of such stock, as of the closing of trading on June 29, 2007,30, 2008, was approximately $27.9$21.8 billion.

          The number of shares outstanding of Liberty Media Corporation's common stock as of January 31, 200830, 2009 was:

Series A Liberty Capital Common Stock—123,177,991;90,038,868;
Series B Liberty Capital Common Stock—5,988,319;6,024,724;
Series A Liberty Interactive Common Stock—566,439,423; and564,400,295;
Series B Liberty Interactive Common Stock—29,498,60829,435,024;
Series A Liberty Entertainment Common Stock—493,269,013; and
Series B Liberty Entertainment Common Stock—23,705,527 shares.

Documents Incorporated by Reference

The Registrant's definitive proxy statement for its 20082009 Annual Meeting of Shareholders is hereby incorporated by reference into Part III of this Annual Report on Form 10-K10-K.

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LIBERTY MEDIA CORPORATION
20072008 ANNUAL REPORT ON FORM 10-K

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 Page

 

Part I

  

Item 1.



Business

I-1
Item 1A.

 Risk FactorsI-27
Item 1B.

Business

 Unresolved Staff CommentsI-38

I-1

Item 2.1A.

 PropertiesI-38
Item 3.

Risk Factors

 Legal ProceedingsI-27I-38

Item 4.1B.

 

Unresolved Staff Comments

I-49

Item 2.

Properties

I-49

Item 3.

Legal Proceedings

I-49

Item 4.

Submission of Matters to a Vote of Security Holders

 I-40I-49


 

Part II


 
 

Item 5.


 

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities



II-1
Item 6.

 Selected Financial DataII-3

II-1

Item 7.6.

 

Selected Financial Data

II-3

Item 7.

Management's Discussion and Analysis of Financial Condition and Results of
Operations

II-4
Item 7A.

 II-4

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

II-31
Item 8.

 II-37

Item 8.

Financial Statements and Supplementary Data

II-33
Item 9.

 II-39

Item 9.

Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

II-33
Item 9A.

 Controls and ProceduresII-39II-33

Item 9B.9A.

 Other Information

Controls and Procedures

 II-33II-39

Item 9B.


 

Other Information

II-39

Part III


 
 

Item 10.


 


Directors, Executive Officers and Corporate Governance



III-1
Item 11.

 

III-1

Executive Compensation

Item 11.

 III-1
Item 12.

Executive Compensation

 III-1

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 III-1

Item 13.

 

Certain Relationships and Related Transactions, and Director Independence

 III-1

Item 14.

 

Principal Accounting Fees and Services

 III-1


 

Part IV


 
 

Item 15.


 

Exhibits and Financial Statement Schedules


 

IV-1


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PART I.

Item 1.    Business.

        Liberty Media Corporation is a holding company which, through its ownership ofowns interests in subsidiaries and other companies is primarilywhich are engaged in the video and on-line commerce, media, communications and entertainment industries. Through our subsidiaries and affiliates, we operate in North America, South America, Europe and Asia. Our principal businesses and assets include QVC, Inc. and Starz, LLC and interests in IAC/InterActiveCorp, Expedia,The DIRECTV Group, Inc. and The DIRECTV Group,Expedia, Inc.

        In May 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 iswas intended to track and reflect the economic performance of one of two groups, the Interactive Group and the Capital Group, respectively. We are

        On March 3, 2008, we completed a reclassification of our Liberty Capital common stock (herein referred to as "Old Liberty Capital common stock") whereby each share of Old Series A Liberty Capital common stock was reclassified into four shares of Series A Liberty Entertainment common stock and one share of new Series A Liberty Capital common stock, and each share of Old Series B Liberty Capital common stock was reclassified into four shares of Series B Liberty Entertainment common stock and one share of new Series B Liberty Capital common stock. The Liberty Entertainment common stock is intended to track and reflect the successor reporting companyeconomic performance of our Entertainment Group, which is comprised of businesses and assets previously attributed to Old Liberty.the Capital Group. The reclassification did not change the businesses, assets and liabilities attributed to the Interactive Group.

        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, the Entertainment Group and the Capital Group have separate collections of businesses, assets and liabilities attributed to them, neitherno 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 that group. 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, Inc., Provide Commerce, Inc., BuySeasons, Inc., Backcountry.com, Inc., and Bodybuilding.com, LLC and BuySeasons, Inc., and our interests in Expedia, Inc., IAC/InterActiveCorp, HSN, Inc., Interval Leisure Group, Inc., Ticketmaster Entertainment, Inc. and IAC/InterActiveCorp.Tree.com, Inc. The Interactive Group will also include such other businesses, assets and liabilities that our board of directors may in the future determine to attribute to the Interactive Group, including such other businesses and assets as we may acquire for the Interactive Group. In addition, we have attributed $3,108$2,263 million principal amount (as of December 31, 2007)2008) of our senior notes and debentures to the Interactive Group.

        Similarly, the term "Entertainment Group" does not represent a separate legal entity, rather it represents those businesses, assets and liabilities which we have attributed to that group and which


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were previously attributed to the Capital Group. The Entertainment Group focuses primarily on video programming, communications businesses and the direct-to-home satellite distribution business and includes our ownership interest in The DIRECTV Group, Inc., as well as an equity collar on 98.75 million of shares of DIRECTV common stock and $1,981 million of borrowings against the put value of such equity collar. We have also attributed to the Entertainment Group our subsidiaries, Starz Entertainment, LLC, FUN Technologies, Inc., Liberty Sports Holdings, LLC and PicksPal, Inc., and equity interests in GSN, LLC and WildBlue Communications. In addition, we have attributed $633 million of corporate cash (as of December 31, 2008) to the Entertainment Group. The Entertainment Group will also include such other businesses, assets and liabilities that our board of directors may in the future determine to attribute to the Entertainment Group, including such other businesses as we may acquire for the Entertainment 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 or the Entertainment Group. The assets and businesses attributed to the Capital Group include our subsidiaries: Starz Entertainment, LLC, Starz Media, LLC, TruePosition, Inc., FUN Technologies, Inc., Atlanta National League Baseball Club, Inc., Leisure Arts, Inc., TruePosition, Inc. and WFRV and WJMN Television Station, Inc.; 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 businesses, assets and liabilities that our board of directors may in the future determine to attribute to the Capital Group, including such other businesses and assets as we may acquire for the Capital Group. In addition, we have attributed $4,481$1,496 million of cash, including subsidiary cash, $104 million of short-term marketable securities and $4,815 million principal amount (as of December 31, 2007)2008) of our senior exchangeable debentures and $750 million of our bankother parent 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.


        In 2007, we continued to work towards our stated goals of simplifying our capital and operating structures. To this end we approved two new tracking stocks, which we intend to issue in March 2008, and we sold our non-strategic subsidiaries On Command and OpenTV Corp. In addition, we acquired an 81% ownership interest in Backcountry.com, Inc. and an 83% ownership interest in Bodybuilding.com, and we exchanged our investment in CBS Corporation for cash and a company owning a television station in Green Bay, Wisconsin and part of our investment in Time Warner Inc. for cash and a company owning the Atlanta Braves and Leisure Arts, Inc.

        During 2007, we continued to repurchase our common stock as we believed it to be undervalued. Our board of directors increased the level of our stock repurchase programs to $2.3 billion for Capital Group and $3.0 billion for Interactive Group. We completed tender offers for our Capital Group and Interactive Group common stock in April and June, respectively. In addition, we continued to repurchase our Interactive Group common stock in the open market. During 2007, total repurchases, including the tender offers aggregated $1,305 million and $1,224 million for Capital Group and Interactive Group, respectively. Since our May 2006 restructuring, we have purchased $1,305 million and $2,178 million of Liberty Capital common stock and Liberty Interactive common stock, respectively.

        In February 2008, we completed our previously announced 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 holdsheld an approximate 41% interest in The DIRECTV Group, Inc., three regional sports television networks and approximately $465 million in cash.

        On October 23, 2007,During 2008, we continued to repurchase 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, oneas we believed it to retain the designationbe undervalued. During 2008, total repurchases aggregated $462 million and $75 million for Capital Group and Interactive Group, respectively. Since our May 2006 restructuring, we have purchased $1,767 million and $2,253 million of Liberty Capital common stock and the other to be designated the Liberty Entertainment common stock.

        Upon implementation of the reclassification, which we expect will be in March 2008, the Liberty EntertainmentInteractive common stock, would be intendedrespectively.

        In December 2008, we announced our intention to track and reflect the separate economic performance of a newly designated Entertainment Group. The Entertainment Group initially would have attributed to itredeem a portion of our Liberty Entertainment tracking stock for the businesses, assets and liabilities that are currently attributedstock of our newly formed subsidiary, Liberty Entertainment, Inc. We refer to the Capitalredemption and the subsequent separation of Liberty Entertainment, Inc. from our Company as the "Split Off." At the time of the Split Off, Liberty Entertainment, Inc. will own our interests in The DIRECTV Group, includingInc., Liberty Sports Holdings, LLC, FUN Technologies, Inc., PicksPal, Inc, GSN, LLC and up to $300 million in cash. Subsequent to the Split Off, our subsidiariesLiberty Entertainment Group will be comprised of our interests in 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 our exchange transaction with News Corporation.

        Upon implementation of the reclassification, the New 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, Atlanta National League Baseball Club, Inc., Leisure Arts, TruePosition and WFRV TV Station, and minority equity investments in Time Warner Inc. and Sprint Nextel Corporation. In addition, the New 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 attributed to our Interactive Group.cash.

* * * * *


        Certain statements in this Annual Report on Form 10-K constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding our business, product and marketing strategies,strategies; new service offerings,offerings; our tax sharing arrangement with AT&T Corp. and estimated amounts payable under that arrangement,arrangement; revenue growth and subscriber trends at QVC, Inc. and Starz Entertainment, LLC,LLC; QVC's ability to comply with the covenants contained in its credit facilities; anticipated programming and marketing costs at Starz Entertainment,Entertainment; the recoverability of our goodwill and other long-lived assets; counterparty performance under our derivative arrangements; our expectations regarding Starz Media's results of operations for the next two to three years,years; our projected sources and uses of cash,cash; the estimated value of our derivative instruments,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 under Item 1. "Business," Item 1A. "Risk-Factors," Item 2. "Properties," Item 3. "Legal Proceedings," Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Item 7A. "Quantitative and Qualitative Disclosures About Market Risk" contain forward-looking statements. Where, in any forward-looking statement, we express an expectation or belief as to future results or events, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the expectation or belief will result or be achieved or accomplished. The following include some but not all of the factors that could cause actual results or events to differ materially from those anticipated:



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These forward-looking statements and such risks, uncertainties and other factors speak only as of the date of this Annual Report, and we expressly disclaim any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained herein, to reflect any change in our expectations with regard thereto, or any other change in events, conditions or circumstances on which any such statement is based. When considering such forward-looking statements, you should keep in mind the factors described in Item 1A, "Risk Factors" and other cautionary statements contained in this Annual Report. Such risk factors and statements describe circumstances which 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 minoritynon-controlling 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.


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        Through our ownership of interests in subsidiaries and other companies, we are primarily engaged in the video and on-line commerce, media, communications and entertainment industries. Each of these businesses is separately managed.

        We identify our reportable segments as (A) those consolidated subsidiaries that represent 10% or more of our consolidated revenue, pre-tax earnings before income taxes or total assets and (B) those equity method affiliates whose share of earnings represent 10% or more of our pre-tax earnings. Financial information related to our operating segments can be found in note 2021 to our consolidated financial statements found in Part II of this report.


        The following table identifies our more significant subsidiaries and minority investments within each of the CapitalInteractive Group, the Entertainment Group and the InteractiveCapital Group as of December 31, 2007.2008.

Capital Group

Consolidated Subsidiaries

Starz, LLC
Starz Entertainment, LLC
Starz Media, LLC
Atlanta National League Baseball Club, Inc.
TruePosition, Inc.
FUN Technologies, Inc.
Leisure Arts, Inc.
WFRV and WJMN Television Station, Inc.

Equity and Cost Method Investments

GSN, LLC
WildBlue Communications, Inc.
News Corporation (NYSE:NWS; NYSE:NWSa)
Time Warner Inc. (NYSE:TWX)(1)
Sprint Nextel Corporation (NYSE:S)(1)

Interactive Group


Consolidated Subsidiaries

QVC, Inc.
Provide Commerce, Inc.
BuySeasons, Inc.
Backcountry.com, Inc.
Bodybuilding.com, LLC

Equity and Cost Method Investments

Expedia, Inc. (Nasdaq:EXPE)
IAC/InterActiveCorp (Nasdaq:IACI)

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IV-14—Instruments Defining the Rights of Securities Holders, including Indentures:

10—Material Contracts:


4.3

Specimen certificate for shares of the Registrant's Liberty Capital Series A common stock, par value $.01 per share (incorporated by reference to Exhibit 4.3 to the May 2006 8-K).

4.4

Specimen certificate for shares of the Registrant's Liberty Capital Series B common stock, par value $.01 per share (incorporated by reference to Exhibit 4.4 to the May 2006 8-K).

10—Material Contracts:

10.1

Inter-Group Agreement dated as of March 9, 1999, between AT&T Corp. and Liberty Media LLC ("Old Liberty"), Liberty Media Group LLC and each Covered Entity listed on the signature pages thereof (incorporated by reference to Exhibit 10.2 to the Registration Statement on Form S-4 of Old Liberty (File No. 333-86491) as filed on September 3, 1999, the "Old Liberty S-4 Registration Statement").

10.2

Ninth Supplement to Inter-Group Agreement dated as of June 14, 2001, between and among AT&T Corp., on the one hand, and Old Liberty, Liberty Media Group LLC, AGI LLC, Liberty SP, Inc., LMC Interactive, Inc. and Liberty AGI, Inc., on the other hand (incorporated by reference to Exhibit 10.25 to the Registration Statement on Form S-1 of Old Liberty (File No. 333-66034) as filed on July 27, 2001).

10.3

Intercompany Agreement dated as of March 9, 1999, between Old Liberty and AT&T Corp. (incorporated by reference to Exhibit 10.3 to the Old Liberty S-4 Registration Statement).

10.4

Tax Sharing Agreement dated as of March 9, 1999, by and among AT&T Corp., Old Liberty, Tele-Communications, Inc., Liberty Ventures Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings, Inc. and each Covered Entity listed on the signature pages thereof (incorporated by reference to Exhibit 10.4 to the Old Liberty S-4 Registration Statement).

10.5

First Amendment to Tax Sharing Agreement dated as of May 28, 1999, by and among AT&T Corp., Old Liberty, Tele-Communications, Inc., Liberty Ventures Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings,  Inc. and each Covered Entity listed on the signature pages thereof (incorporated by reference to Exhibit 10.5 to the Old Liberty S-4 Registration Statement).

10.6

Second Amendment to Tax Sharing Agreement dated as of September 24, 1999, by and among AT&T Corp., Old Liberty, Tele-Communications, Inc., Liberty Ventures Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings, Inc. and each Covered Entity listed on the signature pages thereof (incorporated by reference to Exhibit 10.6 to the Registration Statement on Form S-1 of Old Liberty (File No. 333-93917) as filed on December 30, 1999 (the "Old Liberty S-1 Registration Statement")).

10.7

Third Amendment to Tax Sharing Agreement dated as of October 20, 1999, by and among AT&T Corp., Old Liberty, Tele-Communications, Inc., Liberty Ventures Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings,  Inc. and each Covered Entity listed on the signature pages thereof (incorporated by reference to Exhibit 10.7 to the Old Liberty S-l Registration Statement).

10.8

Fourth Amendment to Tax Sharing Agreement dated as of October 28, 1999, by and among AT&T Corp., Old Liberty, Tele-Communications, Inc., Liberty Ventures Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings, Inc. and each Covered Entity listed on the signature pages thereof (incorporated by reference to Exhibit 10.8 to the Old Liberty S-l Registration Statement).
    10.1
    Tax Sharing Agreement dated as of March 9, 1999, by and among AT&T Corp., Liberty Media LLC ("Old Liberty"), Tele-Communications, Inc., Liberty Ventures Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings, Inc. and each Covered Entity listed on the signature pages thereof (incorporated by reference to Exhibit 10.4 to the Registration Statement on Form S-4 of Old Liberty (File No. 333-86491) as filed on September 3, 1999 (the "Old Liberty S-4 Registration Statement")).

    10.2
    First Amendment to Tax Sharing Agreement dated as of May 28, 1999, by and among AT&T Corp., Old Liberty, Tele-Communications, Inc., Liberty Ventures Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings, Inc. and each Covered Entity listed on the signature pages thereof (incorporated by reference to Exhibit 10.5 to the Old Liberty S-4 Registration Statement).

IV-2


10.9

Fifth Amendment to Tax Sharing Agreement dated as of December 6, 1999, by and among AT&T Corp., Old Liberty, Tele-Communications, Inc., Liberty Ventures Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings,  Inc. and each Covered Entity listed on the signature pages thereof (incorporated by reference to Exhibit 10.9 to the Old Liberty S-l Registration Statement).

10.10

Sixth Amendment to Tax Sharing Agreement dated as of December 10, 1999, by and among AT&T Corp., Old Liberty, Tele-Communications, Inc., Liberty Ventures Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings, Inc. and each Covered Entity listed on the signature pages thereof (incorporated by reference to Exhibit 10.10 to the Old Liberty S-l Registration Statement).

10.11

Seventh Amendment to Tax Sharing Agreement dated as of December 30, 1999, by and among AT&T Corp., Old Liberty, Tele-Communications, Inc., Liberty Ventures Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings, Inc. and each Covered Entity listed on the signature pages thereof (incorporated by reference to Exhibit 10.11 to the Old Liberty S-l Registration Statement).

10.12

Eighth Amendment to Tax Sharing Agreement dated as of July 25, 2000, by and among AT&T Corp., Old Liberty, Tele-Communications, Inc., Liberty Ventures Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings,  Inc. and each Covered Entity listed on the signature pages thereof (incorporated by reference to Exhibit 10.12 to the Registration Statement on Form S-1 of Old Liberty (File No. 333-55998) as filed on February 21, 2001).

10.13

Instrument dated January 14, 2000, adding The Associated Group, Inc. as a party to the Tax Sharing Agreement dated as of March 9, 1999, as amended, among The Associated Group, Inc., AT&T Corp., Old Liberty, Tele-Communications,  Inc., Liberty Ventures Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings, Inc. and each Covered Entity listed on the signature pages thereof (incorporated by reference to Exhibit 10.12 to the Old Liberty S-1 Registration Statement).

10.14

Restated and Amended Employment Agreement dated November 1, 1992, between Tele-Communications, Inc. and John C. Malone (assumed by Old Liberty as of March 9, 1999), and the amendment thereto dated June 30, 1999 and effective as of March 9, 1999, between Old Liberty and John C. Malone (collectively, the "Malone Employment Agreement") (incorporated by reference to Exhibit 10.6 to the Old Liberty S-4 Registration Statement).

10.15

Second Amendment to Malone Employment Agreement effective January 1, 2003 (incorporated by reference to Exhibit 10.15 to Old Liberty's Annual Report on Form 10-K for the year ended December 31, 2003 (File No. 001-16615) as filed on March 15, 2004 (the "Old Liberty 2003 10-K"

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      10.3
      Second Amendment to Tax Sharing Agreement dated as of September 24, 1999, by and among AT&T Corp., Old Liberty, Tele-Communications, Inc., Liberty Ventures Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings, Inc. and each Covered Entity listed on the signature pages thereof (incorporated by reference to Exhibit 10.6 to the Registration Statement on Form S-1 of Old Liberty (File No. 333-93917) as filed on December 30, 1999 (the "Old Liberty S-1 Registration Statement")).

    10.16

    Liberty Media Corporation 2000 Incentive Plan (As Amended and Restated Effective February 22, 2007) (the "2000 Incentive Plan") (incorporated by reference to Exhibit 10.2 to Liberty's Quarterly Report on Form 10-Q for the period ended September 30, 2007 (File No. 000-51990) as filed on November 9, 2007).

    10.17

    Liberty Media Corporation 2007 Incentive Plan (the "2007 Incentive Plan") (incorporated by reference to Exhibit 10.1 to Liberty's Quarterly Report on Form 10-Q for the period ended September 30, 2007 (File No. 000-51990) as filed on November 9, 2007).


    10.4
    Third Amendment to Tax Sharing Agreement dated as of October 20, 1999, by and among AT&T Corp., Old Liberty, Tele-Communications, Inc., Liberty Ventures Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings, Inc. and each Covered Entity listed on the signature pages thereof (incorporated by reference to Exhibit 10.7 to the Old Liberty S-l Registration Statement).

    10.5
    Fourth Amendment to Tax Sharing Agreement dated as of October 28, 1999, by and among AT&T Corp., Old Liberty, Tele-Communications, Inc., Liberty Ventures Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings, Inc. and each Covered Entity listed on the signature pages thereof (incorporated by reference to Exhibit 10.8 to the Old Liberty S-l Registration Statement).

    10.6
    Fifth Amendment to Tax Sharing Agreement dated as of December 6, 1999, by and among AT&T Corp., Old Liberty, Tele-Communications, Inc., Liberty Ventures Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings, Inc. and each Covered Entity listed on the signature pages thereof (incorporated by reference to Exhibit 10.9 to the Old Liberty S-l Registration Statement).

    10.7
    Sixth Amendment to Tax Sharing Agreement dated as of December 10, 1999, by and among AT&T Corp., Old Liberty, Tele-Communications, Inc., Liberty Ventures Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings, Inc. and each Covered Entity listed on the signature pages thereof (incorporated by reference to Exhibit 10.10 to the Old Liberty S-l Registration Statement).

    10.8
    Seventh Amendment to Tax Sharing Agreement dated as of December 30, 1999, by and among AT&T Corp., Old Liberty, Tele-Communications, Inc., Liberty Ventures Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings, Inc. and each Covered Entity listed on the signature pages thereof (incorporated by reference to Exhibit 10.11 to the Old Liberty S-l Registration Statement).

    10.9
    Eighth Amendment to Tax Sharing Agreement dated as of July 25, 2000, by and among AT&T Corp., Old Liberty, Tele-Communications, Inc., Liberty Ventures Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings, Inc. and each Covered Entity listed on the signature pages thereof (incorporated by reference to Exhibit 10.12 to the Registration Statement on Form S-1 of Old Liberty (File No. 333-55998) as filed on February 21, 2001).

    10.10
    Instrument dated January 14, 2000, adding The Associated Group, Inc. as a party to the Tax Sharing Agreement dated as of March 9, 1999, as amended, among The Associated Group, Inc., AT&T Corp., Old Liberty, Tele-Communications, Inc., Liberty Ventures Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings, Inc. and each Covered Entity listed on the signature pages thereof (incorporated by reference to Exhibit 10.12 to the Old Liberty S-1 Registration Statement).

    10.11
    Restated and Amended Employment Agreement dated November 1, 1992, between Tele-Communications, Inc. and John C. Malone (assumed by Old Liberty as of March 9, 1999), and the amendment thereto dated June 30, 1999 and effective as of March 9, 1999, between Old Liberty and John C. Malone (collectively, the "Malone Employment

    IV-3


    10.18

    Form of Non-Qualified Stock Option Agreement under the 2000 Incentive Plan and the 2007 Incentive Plan [for certain designated award recipients] (incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q of Old Liberty for the quarter ended March 31, 2006 (File No. 001-16615) as filed on May 8, 2006 (the "Old Liberty 10-Q")).

    10.19

    Form of Non-Qualified Stock Option Agreement under the 2000 Incentive Plan and the 2007 Incentive Plan [for all other award recipients] (incorporated by reference to Exhibit 10.3 of the Old Liberty 10-Q).

    10.20

    Form of Restricted Stock Award Agreement under the 2000 Incentive Plan and the 2007 Incentive Plan [for certain designated award recipients] (incorporated by reference to Exhibit 10.4 to the Old Liberty 10-Q).

    10.21

    Form of Stock Appreciation Rights Agreement under the 2000 Incentive Plan and the 2007 Incentive Plan (incorporated by reference to Exhibit 10.18 to the Annual Report on Form 10-K of Old Liberty for the year ended December 31, 2004 (File No. 001-16615) as filed on March 15, 2005 (the "Old Liberty 2005 10-K")).

    10.22

    Liberty Media Corporation 2002 Nonemployee Director Incentive Plan (As amended and restated Effective August 15, 2007) (the "Director Plan") (incorporated by reference to Exhibit 10.3 to Liberty's Quarterly Report on Form 10-Q for the period ended September 30, 2007 (File No. 000-51990) as filed on November 9, 2007).

    10.23

    Form of Stock Appreciation Rights Agreement under the Director Plan (incorporated by reference to Exhibit 10.21 to the Old Liberty 2005 10-K).

    10.24

    Liberty Media Corporation 2006 Deferred Compensation Plan (incorporated by reference to Exhibit 99.1 to Liberty's Current Report on Form 8-K (File No. 000-51990) as filed on January 5, 2007).

    10.25

    Employment Agreement, dated as of December 28, 2005, between Old Liberty and Mr. Bennett (incorporated by reference to Exhibit 99.1 to Old Liberty's Current Report on Form 8-K (File No. 001-16615) as filed on December 30, 2005 (the "Old Liberty December 2005 8-K")).

    10.26

    Amended and Restated Deferred Compensation Agreement, dated as of December 28, 2005, between Old Liberty and Mr. Bennett (incorporated by reference to Exhibit 99.2 to the Old Liberty December 2005 8-K).

    10.27

    Amended and Restated Deferred Compensation Agreement, dated as of December 28, 2005, between Mr. Bennett and Old Liberty (incorporated by reference to Exhibit 99.3 to the Old Liberty December 2005 8-K).

    10.28

    Deferred Compensation Agreement, dated as of July 1, 2005, between Mr. Bennett and Old Liberty (incorporated by reference to Exhibit 99.4 to the Old Liberty December 2005 8-K).

    10.29

    Call Agreement, dated as of February 9, 1998 (the "Call Agreement"), between Liberty (as successor of Old Liberty which was the assignee of Tele-Communications, Inc.) and the Malone Group (incorporated by reference to Exhibit 7(n) to Mr. Malone's Amendment No. 8 to Schedule 13D filed in respect of Tele-Communications, Inc. on February 19, 1998 (File No. 005-44063)).

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        Agreement") (incorporated by reference to Exhibit 10.6 to the Old Liberty S-4 Registration Statement).

      10.12
      Second Amendment to Malone Employment Agreement effective January 1, 2003 (incorporated by reference to Exhibit 10.15 to Old Liberty's Annual Report on Form 10-K for the year ended December 31, 2003 (File No. 001-16615) as filed on March 15, 2004).

      10.13
      Third Amendment to Malone Employment Agreement effective January 1, 2007.*

      10.14
      Fourth Amendment to Malone Employment Agreement effective January 1, 2009.*

      10.15
      Liberty Media Corporation 2000 Incentive Plan (As Amended and Restated Effective February 22, 2007) (the "2000 Incentive Plan").*

      10.16
      Liberty Media Corporation 2007 Incentive Plan (the "2007 Incentive Plan").*

      10.17
      Form of Non-Qualified Stock Option Agreement under the 2000 Incentive Plan and the 2007 Incentive Plan [for certain designated award recipients] (incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q of Old Liberty for the quarter ended March 31, 2006 (File No. 001-16615) as filed on May 8, 2006 (the "Old Liberty 10-Q")).

      10.18
      Form of Non-Qualified Stock Option Agreement under the 2000 Incentive Plan and the 2007 Incentive Plan [for all other award recipients] (incorporated by reference to Exhibit 10.3 of the Old Liberty 10-Q).

      10.19
      Form of Restricted Stock Award Agreement under the 2000 Incentive Plan and the 2007 Incentive Plan [for certain designated award recipients] (incorporated by reference to Exhibit 10.4 to the Old Liberty 10-Q).

      10.20
      Form of Stock Appreciation Rights Agreement under the 2000 Incentive Plan and the 2007 Incentive Plan (incorporated by reference to Exhibit 10.18 to the Annual Report on Form 10-K of Old Liberty for the year ended December 31, 2004 (File No. 001-16615) as filed on March 15, 2005 (the "Old Liberty 2005 10-K")).

      10.21
      Liberty Media Corporation 2002 Nonemployee Director Incentive Plan (As Amended and Restated Effective August 15, 2007) (the "Director Plan").*

      10.22
      Form of Stock Appreciation Rights Agreement under the Director Plan (incorporated by reference to Exhibit 10.21 to the Old Liberty 2005 10-K).

      10.23
      Liberty Media Corporation 2006 Deferred Compensation Plan (incorporated by reference to Exhibit 99.1 to Liberty's Current Report on Form 8-K (File No. 000-51990) as filed on January 5, 2007).

      10.24
      Employment Agreement, dated as of December 28, 2005, between Old Liberty and Mr. Bennett (incorporated by reference to Exhibit 99.1 to Old Liberty's Current Report on Form 8-K (File No. 001-16615) as filed on December 30, 2005).

      10.25
      Letter Agreement regarding personal use of Liberty's aircraft, dated as of February 22, 2008, between Gregory B. Maffei and Liberty (incorporated by reference to Exhibit 10.38 to Liberty's Annual Report on Form 10-K for the year ended December 31, 2007 (File No. 000-51990) as filed on February 29, 2008).

      10.26
      Call Agreement, dated as of February 9, 1998 (the "Call Agreement"), between Liberty (as successor of Old Liberty which was the assignee of Tele-Communications, Inc.) and the Malone Group.*

      10.27
      Letter, dated as of March 5, 1999, from Tele-Communications, Inc. and Old Liberty addressed to Mr. Malone and Leslie Malone relating to the Call Agreement (incorporated

    IV-4


    10.30

    Letter, dated as of March 5, 1999, from Tele-Communications, Inc. and Old Liberty addressed to Mr. Malone and Leslie Malone relating to the Call Agreement (incorporated by reference to Exhibit 7(f) to Mr. Malone's Schedule 13D filed in respect of AT&T on March 30, 1999 (File No. 005-32542)).

    10.31

    $3,500,000,000 Credit Agreement, dated as of March 3, 2006, among QVC, Inc., as Borrower; the Lenders party hereto; JP Morgan Chase Bank, N.A., as Administrative Agent; and Wachovia Capital Markets, LLC, as Syndication Agent (the "March 2006 Credit Agreement") (incorporated by reference to Exhibit 10.1 to the Old Liberty 10-Q).

    10.32

    Amendment dated October 4, 2006 to the March 2006 Credit Agreement (incorporated by reference to Exhibit 99.2 to Liberty's Current Report on Form 8-K (File No. 000-51990) as filed on October 10, 2006 (the "October 2006 8-K")).

    10.33

    $1,750,000,000 Credit Agreement, dated as of October 4, 2006 among QVC, Wachovia Bank, N.A., as Administrative Agent, Bank of America N.A. and J.P. Morgan Securities Inc., as Syndication Agents, and the lenders party thereto from time to time (incorporated by reference to Exhibit 99.1 to the October 2006 8-K).

    10.34

    Form of Indemnification Agreement between Liberty and its executive officers/directors (incorporated by reference to Exhibit 10.37 to Liberty's Annual Report on Form 10-K for the year ended December 31, 2006 (File No. 000-51990) as filed on March 1, 2007).

    10.35

    Share Exchange Agreement, dated as of December 22, 2006, by and between News Corporation and Liberty (the "News Agreement") (incorporated by reference to Exhibit 10.38 to Liberty's Annual Report on Form 10-K for the year ended December 31, 2006 (File No. 000-51990) as filed on March 1, 2007).

    10.36

    Tax Matters Agreement, dated as of December 22, 2006, by and between News Corporation and Liberty (which is Exhibit A-I to the News Agreement) (incorporated by reference to Exhibit 10.39 to Liberty's Annual Report on Form 10-K for the year ended December 31, 2006 (File No. 000-51990) as filed on March 1, 2007).

    10.37

    Letter Agreement regarding personal use of Liberty's aircraft, dated as of April 2, 2007, between Gregory B. Maffei and Liberty (superceded by Letter Agreement filed as Exhibit 10.38 hereto) (incorporated by reference to Exhibit 10.1 to Liberty's Quarterly Report on Form 10-Q for the period ended March 31, 2007 (File No. 000-51990) as filed on May 8, 2007).

    10.38

    Letter Agreement regarding personal use of Liberty's aircraft, dated as of February 22, 2008, between Gregory B. Maffei and Liberty.*

    21

    Subsidiaries of Liberty Media Corporation.*

    23

    Consent of KPMG LLP.*

    31.1

    Rule 13a-14(a)/15d-14(a) Certification.*

    31.2

    Rule 13a-14(a)/15d-14(a) Certification.*

    31.3

    Rule 13a-14(a)/15d-14(a) Certification.*

    32

    Section 1350 Certification. *

    99.1

    Unaudited Attributed Financial Information for Tracking Stock Groups.*

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        by reference to Exhibit 7(f) to Mr. Malone's Schedule 13D filed in respect of AT&T on March 30, 1999 (File No. 005-32542)).

      10.28
      $3,500,000,000 Credit Agreement, dated as of March 3, 2006, among QVC, Inc., as Borrower; the Lenders party hereto; JP Morgan Chase Bank, N.A., as Administrative Agent; and Wachovia Capital Markets, LLC, as Syndication Agent (the "March 2006 Credit Agreement") (incorporated by reference to Exhibit 10.1 to the Old Liberty 10-Q).

      10.29
      Amendment dated October 4, 2006 to the March 2006 Credit Agreement (incorporated by reference to Exhibit 99.2 to Liberty's Current Report on Form 8-K (File No. 000-51990) as filed on October 10, 2006 (the "October 2006 8-K")).

      10.30
      $1,750,000,000 Credit Agreement, dated as of October 4, 2006 among QVC, Wachovia Bank, N.A., as Administrative Agent, Bank of America N.A. and J.P. Morgan Securities Inc., as Syndication Agents, and the lenders party thereto from time to time (incorporated by reference to Exhibit 99.1 to the October 2006 8-K).

      10.31
      Form of Indemnification Agreement between Liberty and its executive officers/directors (incorporated by reference to Exhibit 10.37 to Liberty's Annual Report on Form 10-K for the year ended December 31, 2006 (File No. 000-51990) as filed on March 1, 2007).

      10.32
      Share Exchange Agreement, dated as of December 22, 2006, by and between News Corporation and Liberty (the "News Agreement") (incorporated by reference to Exhibit 10.38 to Liberty's Annual Report on Form 10-K for the year ended December 31, 2006 (File No. 000-51990) as filed on March 1, 2007).

      10.33
      Tax Matters Agreement, dated as of December 22, 2006, by and between News Corporation and Liberty (which is Exhibit A-I to the News Agreement) (incorporated by reference to Exhibit 10.39 to Liberty's Annual Report on Form 10-K for the year ended December 31, 2006 (File No. 000-51990) as filed on March 1, 2007).

      10.34
      Letter Agreement, dated as of May 6, 2008, by and among The DirecTV Group, Inc., Liberty, Greenlady Corporation and Greenlady II, LLC (incorporated by reference to Exhibit 10.1 to The DirecTV Group, Inc.'s Current Report on Form 8-K (File No. 001-31945) as filed on May 7, 2008).

    21—Subsidiaries of Liberty Media Corporation.*

    23
    Consent of KPMG LLP.*

    23.1
    Consent of Deloitte & Touche LLP*

    23.2
    Consent of Ernst & Young LLP*

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

    31.2
    Rule 13a-14(a)/15d-14(a) Certification.*

    31.3
    Rule 13a-14(a)/15d-14(a) Certification.*

    32
    Section 1350 Certification.*

    99.1
    Unaudited Attributed Financial Information for Tracking Stock Groups.*
    *
    Filed herewith.

    IV-5

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    REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

    To the Board of Directors and Stockholders of The DIRECTV Group, Inc.
    El Segundo, California

            We have audited the accompanying consolidated balance sheets of The DIRECTV Group, Inc. (the "Company") as of December 31, 2008 and 2007, and the related consolidated statements of operations, changes in stockholders' equity and comprehensive income, and cash flows for each of the three years in the period ended December 31, 2008. Our audits also included the financial statement schedules listed in the Index at Item 15. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedules 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, such consolidated financial statements present fairly, in all material respects, the financial position of The DIRECTV Group, Inc. at December 31, 2008 and 2007, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2008, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

            As discussed in Note 2 of the Notes to the Consolidated Financial Statements, effective January 1, 2007, the Company adopted Financial Accounting Standards Board, or FASB, Interpretation No. 48,Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109; effective December 31, 2007, the Company adopted the measurement date provision of Statement of Financial Accounting Standards No. 158,Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R).

            We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of December 31, 2008, based on the criteria established inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 26, 2009 expressed an unqualified opinion on the Company's internal control over financial reporting.

    /s/ DELOITTE & TOUCHE LLP

    Los Angeles, California
    February 26, 2009

    IV-6

    Table of Contents


    THE DIRECTV GROUP, INC.

    CONSOLIDATED STATEMENTS OF OPERATIONS

     
    		 
    Years Ended December 31,
    		 
     
    		 
    2008
    		 
    2007
    		 
    2006
    		 
     
    		 (Dollars in Millions, Except Per Share Amounts)
    		 

    Revenues

    		 $19,693 $17,246 $14,755 

    Operating costs and expenses

    		          
      

    Costs of revenues, exclusive of depreciation and amortization expense

    		          
        

    Broadcast programming and other

    		  8,298  7,346  6,201 
        

    Subscriber service expenses

    		  1,290  1,240  1,111 
        

    Broadcast operations expenses

    		  360  323  286 
      

    Selling, general and administrative expenses, exclusive of depreciation and amortization expense

    		          
        

    Subscriber acquisition costs

    		  2,429  2,096  1,945 
        

    Upgrade and retention costs

    		  1,058  976  870 
        

    General and administrative expenses

    		  1,243  1,095  1,069 
        

    Gain from disposition of businesses

    		  —  —  (118)

    Depreciation and amortization expense

    		  2,320  1,684  1,034 
            
          

    Total operating costs and expenses

    		  16,998  14,760  12,398 
            

    Operating profit

    		  2,695  2,486  2,357 

    Interest income

    		  81  111  146 

    Interest expense

    		  (360) (235) (246)

    Other, net

    		  55  26  42 
            

    Income from continuing operations before income taxes and minority interests

    		  2,471  2,388  2,299 

    Income tax expense

    		  (864) (943) (866)

    Minority interests in net earnings of subsidiaries

    		  (92) (11) (13)
            

    Income from continuing operations

    		  1,515  1,434  1,420 

    Income from discontinued operations, net of taxes

    		  6  17  — 
            

    Net income

    		 $1,521 $1,451 $1,420 
            

    Basic earnings per common share:

    		          

    Income from continuing operations

    		 $1.36 $1.20 $1.13 

    Income from discontinued operations, net of taxes

    		  0.01  0.01  — 
            

    Net income

    		 $1.37 $1.21 $1.13 
            

    Diluted earnings per common share:

    		          

    Income from continuing operations

    		 $1.36 $1.20 $1.12 

    Income from discontinued operations, net of taxes

    		  0.01  0.01  — 
            

    Net income

    		 $1.37 $1.21 $1.12 
            

    Weighted average number of common shares outstanding (in millions):

    		          
     

    Basic

    		  1,110  1,195  1,262 
     

    Diluted

    		  1,114  1,202  1,270 

    The accompanying notes are an integral part of these Consolidated Financial Statements.

    IV-7

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    THE DIRECTV GROUP, INC.


    CONSOLIDATED BALANCE SHEETS

     
    		 
    December 31,
    		 
     
    		 
    2008
    		 
    2007
    		 
     
    		 (Dollars in Millions, Except Share Data)
    		 

    ASSETS

    		       

    Current assets

    		       
      

    Cash and cash equivalents

    		 $2,005 $1,083 
      

    Accounts receivable, net

    		  1,423  1,535 
      

    Inventories

    		  192  193 
      

    Deferred income taxes

    		  68  90 
      

    Prepaid expenses and other

    		  356  245 
          
        

    Total current assets

    		  4,044  3,146 

    Satellites, net

    		  2,476  2,026 

    Property and equipment, net

    		  4,171  3,807 

    Goodwill

    		  3,753  3,669 

    Intangible assets, net

    		  1,172  1,577 

    Investments and other assets

    		  923  838 
          
        

    Total assets

    		 $16,539 $15,063 
          

    LIABILITIES AND STOCKHOLDERS' EQUITY

    		       

    Current liabilities

    		       
      

    Accounts payable and accrued liabilities

    		 $3,115 $3,032 
      

    Unearned subscriber revenues and deferred credits

    		  362  354 
      

    Current portion of long-term debt

    		  108  48 
          
        

    Total current liabilities

    		  3,585  3,434 

    Long-term debt

    		  5,725  3,347 

    Deferred income taxes

    		  524  567 

    Other liabilities and deferred credits

    		  1,749  1,402 

    Commitments and contingencies

    		       

    Minority interests redeemable at fair value of $325 million as of December 31, 2008

    		  103  11 

    Stockholders' equity

    		       
      

    Common stock and additional paid-in capital—$0.01 par value, 3,000,000,000 shares authorized, 1,024,182,043 shares and 1,148,268,203 shares issued and outstanding at December 31, 2008 and December 31, 2007, respectively

    		  8,540  9,318 
      

    Accumulated deficit

    		  (3,559) (2,995)
      

    Accumulated other comprehensive loss

    		  (128) (21)
          
        

    Total stockholders' equity

    		  4,853  6,302 
          
        

    Total liabilities and stockholders' equity

    		 $16,539 $15,063 
          

    The accompanying notes are an integral part of these Consolidated Financial Statements.

    IV-8

    Table of Contents


    THE DIRECTV GROUP, INC.

    CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME

     
    		 
    Common
    Shares
    		 
    Common
    Stock and
    Additional
    Paid-In
    Capital
    		 
    Accumulated
    Deficit
    		 
    Accumulated
    Other
    Comprehensive
    Loss,
    net of taxes
    		 
    Total
    Stockholders'
    Equity
    		 
    Comprehensive
    Income,
    net of taxes
    		 
     
    		 (Dollars in Millions, Except Share Data)
    		 

    Balance at January 1, 2006

    		  1,391,031,989 $10,956 $(3,002)$(14)$7,940    

    Net income

    		        1,420     1,420 $1,420 

    Stock repurchased and retired

    		  (184,115,524) (1,452) (1,525)    (2,977)   

    Stock options exercised and restricted stock units vested and distributed

    		  19,573,728  257        257    

    Share-based compensation expense

    		     39        39    

    Tax benefit from stock option exercises

    		     42        42    

    Other

    		     (6)       (6)   

    Minimum pension liability adjustment, net of tax

    		           24  24  24 

    Adjustment to initially record funded status of defined benefit plans upon adoption of SFAS No. 158, net of tax

    		           (46) (46)   

    Foreign currency translation adjustments

    		           2  2  2 

    Unrealized losses on securities, net of tax

    		           (14) (14) (14)
                       

    Comprehensive income

    		                $1,432 
                  

    Balance at December 31, 2006

    		  1,226,490,193  9,836  (3,107) (48) 6,681    

    Net Income

    		        1,451     1,451 $1,451 

    Stock repurchased and retired

    		  (86,173,710) (692) (1,333)    (2,025)   

    Stock options exercised and restricted stock units vested and distributed

    		  7,951,720  118        118    

    Share-based compensation expense

    		     49        49    

    Tax benefit from stock option exercises

    		     18        18    

    Other

    		     (11)       (11)   

    Adjustment to initially record cumulative effect of adopting FIN 48, net of tax

    		        (5)    (5)   

    Adjustment to record adoption of measurement date provisions of SFAS No. 158, net of tax

    		        (1)    (1)   

    Amortization of amounts resulting from changes in defined benefit plan experience and actuarial assumptions, net of tax

    		           16  16  16 

    Foreign currency translation adjustments

    		           (1) (1) (1)

    Unrealized gains on securities, net of tax

    		           12  12  12 
                       

    Comprehensive income

    		                $1,478 
                  

    Balance at December 31, 2007

    		  1,148,268,203  9,318  (2,995) (21) 6,302    

    Net Income

    		        1,521     1,521 $1,521 

    Stock repurchased and retired

    		  (131,476,804) (1,089) (2,085)    (3,174)   

    Stock options exercised and restricted stock units vested and distributed

    		  7,390,644  105        105    

    Share-based compensation expense

    		     51        51    

    Tax benefit from stock option exercises

    		     15        15    

    Capital contribution

    		     160        160    

    Other

    		     (20)       (20)   

    Amortization of amounts resulting from changes in defined benefit plan experience and actuarial assumptions, net of tax

    		           (87) (87) (87)

    Unrealized losses on securities, net of tax

    		           (20) (20) (20)
                       

    Comprehensive income

    		                $1,414 
                  

    Balance at December 31, 2008

    		  1,024,182,043 $8,540 $(3,559)$(128)$4,853    
                   

    The accompanying notes are an integral part of these Consolidated Financial Statements.

    IV-9

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    THE DIRECTV GROUP, INC.

    CONSOLIDATED STATEMENTS OF CASH FLOWS

     
    		 
    Years Ended December 31,
    		 
     
    		 
    2008
    		 
    2007
    		 
    2006
    		 
     
    		 (Dollars in Millions)
    		 

    Cash Flows From Operating Activities

    		          
     

    Net income

    		 $1,521 $1,451 $1,420 
     

    Income from discontinued operations, net of taxes

    		  (6) (17) — 
            
     

    Income from continuing operations

    		  1,515  1,434  1,420 
     

    Adjustments to reconcile income from continuing operations to net cash provided by operating activities:

    		          
      

    Depreciation and amortization

    		  2,320  1,684  1,034 
      

    Amortization of deferred revenues and deferred credits

    		  (104) (98) (41)
      

    Gain from disposition of businesses

    		  —  —  (118)
      

    Dividends received

    		  35  —  — 
      

    Deferred income taxes

    		  107  439  765 
      

    Other

    		  119  45  23 
      

    Change in operating assets and liabilities:

    		          
       

    Accounts and notes receivable

    		  95  (166) (283)
       

    Inventories

    		  18  (45) 139 
       

    Prepaid expenses and other

    		  (96) 46  (12)
       

    Accounts payable and accrued liabilities

    		  (23) 255  158 
       

    Unearned subscriber revenues and deferred credits

    		  8  72  2 
       

    Other, net

    		  (84) (21) 75 
            
        

    Net cash provided by operating activities

    		  3,910  3,645  3,162 
            

    Cash Flows From Investing Activities

    		          
     

    Cash paid for property and equipment

    		  (2,101) (2,523) (1,754)
     

    Cash paid for satellites

    		  (128) (169) (222)
     

    Investment in companies, net of cash acquired

    		  (204) (348) (389)
     

    Purchase of short-term investments

    		  —  (588) (2,517)
     

    Sale of short-term investments

    		  —  748  3,029 
     

    Proceeds from sale of investments

    		  —  —  182 
     

    Proceeds from collection of notes receivable

    		  —  —  142 
     

    Other, net

    		  45  58  (7)
            
        

    Net cash used in investing activities

    		  (2,388) (2,822) (1,536)
            

    Cash Flows From Financing Activities

    		          
     

    Cash proceeds from debt issuance

    		  2,490  —  — 
     

    Debt issuance costs

    		  (19) —  — 
     

    Repayment of long-term debt

    		  (53) (220) (8)
     

    Net increase (decrease) in short-term borrowings

    		  —  2  (2)
     

    Repayment of other long-term obligations

    		  (117) (121) (100)
     

    Common shares repurchased and retired

    		  (3,174) (2,025) (2,977)
     

    Capital contribution

    		  160  —  — 
     

    Stock options exercised

    		  105  118  257 
     

    Excess tax benefit from share-based compensation

    		  8  7  2 
            
        

    Net cash used in financing activities

    		  (600) (2,239) (2,828)
            

    Net increase (decrease) in cash and cash equivalents

    		  922  (1,416) (1,202)

    Cash and cash equivalents at beginning of the year

    		  1,083  2,499  3,701 
            

    Cash and cash equivalents at end of the year

    		 $2,005 $1,083 $2,499 
            

    Supplemental Cash Flow Information

    		          
     

    Cash paid for interest

    		 $334 $230 $243 
     

    Cash paid for income taxes

    		  706  408  30 

    The accompanying notes are an integral part of these Consolidated Financial Statements.

    IV-10

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    THE DIRECTV GROUP, INC.

    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

    Note 1: Description of Business

            The DIRECTV Group, Inc., which we sometimes refer to as the company, we, or us, is a leading provider of digital television entertainment in the United States and Latin America. Our two business segments, DIRECTV U.S. and DIRECTV Latin America, which are differentiated by their geographic location, are engaged in acquiring, promoting, selling and/or distributing digital entertainment programming via satellite to residential and commercial subscribers.

      •
      DIRECTV U.S.  DIRECTV Holdings LLC and its subsidiaries, which we refer to as DIRECTV U.S., is the largest provider of direct-to-home, or DTH, digital television services and the second largest provider in the multi-channel video programming distribution, or MVPD, industry in the United States.

      •
      DIRECTV Latin America.  DIRECTV Latin America, or DTVLA, is a leading provider of DTH digital television services throughout Latin America. DTVLA is comprised of: PanAmericana, which provides services in Venezuela, Argentina, Chile, Colombia, Puerto Rico and certain other countries in the region through our wholly-owned subsidiary, DIRECTV Latin America, LLC, or DLA LLC; our 74% owned subsidiary Sky Brasil Servicos Ltda., which we refer to as Sky Brazil; and our 41% equity method investment in Innova, S. de R.L. de C.V., or Sky Mexico.

    Note 2: Basis of Presentation and Summary of Significant Accounting Policies

    Principles of Consolidation

            We present our accompanying financial statements on a consolidated basis and include our accounts and those of our domestic and foreign subsidiaries that we control through equity ownership or for which we are deemed to be the primary beneficiary, after elimination of intercompany accounts and transactions. We allocate earnings and losses to minority interests only to the extent of a minority investor's investment in a subsidiary.

    Use of Estimates in the Preparation of the Consolidated Financial Statements

            We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, which requires us to make estimates and assumptions that affect amounts reported herein. We base our estimates and assumptions on historical experience and on various other factors that we believe to be reasonable under the circumstances. Due to the inherent uncertainty involved in making estimates, our actual results reported in future periods may be affected by changes in those estimates.

    Revenue Recognition

            We recognize subscription and pay-per-view revenues when programming is broadcast to subscribers. We recognize subscriber fees for multiple set-top receivers, our published programming guide, warranty services and equipment rental as revenue, as earned. We recognize advertising revenues when the related services are performed. We defer programming payments received from subscribers in advance of the broadcast as "Unearned subscriber revenues and deferred credits" in the Consolidated Balance Sheets until earned.

    Broadcast Programming and Other

            We recognize the costs of television programming distribution rights when we distribute the related programming. We recognize the costs of television programming rights to distribute live sporting events

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    THE DIRECTV GROUP, INC.

    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)


    for a season or tournament to expense using the straight-line method over the course of the season or tournament. However, we recognize the costs for live sporting events with multi-year contracts and minimum guarantee payments based on the ratio of each period's revenues to the estimated total contract revenues to be earned over the contract period. We evaluate estimated total contract revenues at least annually.

            We defer advance payments in the form of cash and equity instruments from programming content providers for carriage of their signal and recognize them as a reduction of "Broadcast programming and other" in the Consolidated Statements of Operations on a straight-line basis over the related contract term. We record equity instruments at fair value based on quoted market prices or values determined by management. Through the end of 2006, we also recorded the amortization of a provision for above-market programming contracts that we recorded in connection with the 1999 acquisition of certain premium subscription programming contracts from United States Satellite Broadcasting Company, Inc. as a reduction of programming costs.

    Subscriber Acquisition Costs

            Subscriber acquisition costs consist of costs we incur to acquire new subscribers. We include the cost of set-top receivers and other equipment, commissions we pay to national retailers, independent satellite television retailers, dealers, telephone communication companies and the cost of installation, advertising, marketing and customer call center expenses associated with the acquisition of new subscribers in subscriber acquisition costs. We expense these costs as incurred, or when subscribers activate the DIRECTV® service, as appropriate, except for the cost of set-top receivers leased to new subscribers which we capitalize in "Property and equipment, net" in the Consolidated Balance Sheets. Although paid in advance, the retailer or dealer earns substantially all commissions paid for customer acquisitions over 12 months from the date of subscriber activation. Should the subscriber cancel our service during the 12 month service period, we are reimbursed for the unearned portion of the commission by the retailer or dealer and record a decrease to subscriber acquisition costs. DIRECTV U.S. implemented a lease program on March 1, 2006, after which most set-top receivers provided to new subscribers are capitalized. We include the amount of our set-top receivers capitalized each period for subscriber acquisition activities in the Consolidated Statements of Cash Flows under the caption "Cash paid for property and equipment." See Note 4 below for additional information.

    Upgrade and Retention Costs

            Upgrade and retention costs consist primarily of costs we incur for loyalty programs offered to existing subscribers. The costs for loyalty programs include the costs of installing or providing hardware under our movers program (for subscribers relocating to a new residence), multiple set-top receiver offers, digital video recorder, or DVR, high-definition, or HD, local channel upgrade programs and other similar initiatives, and third party commissions we incur for the sale of additional set-top receivers to existing subscribers. We expense these costs as incurred, except for the cost of set-top receivers leased to existing subscribers which we capitalize in "Property and equipment, net" in the Consolidated Balance Sheets. DIRECTV U.S. implemented a lease program on March 1, 2006, after which most set-top receivers provided to existing subscribers under upgrade and retention programs are capitalized. We include the amount of our set-top receivers capitalized each period for upgrade and retention activities in the Consolidated Statements of Cash Flows under the caption "Cash paid for property and equipment." See Note 4 below for additional information.

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    THE DIRECTV GROUP, INC.

    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

    Cash and Cash Equivalents

            Cash and cash equivalents consist of highly liquid investments we purchase with original maturities of three months or less.

    Inventories

            We state inventories at the lower of average cost or market. Inventories consist of finished goods for DIRECTV System equipment and DIRECTV System access cards.

    Property and Equipment, Satellites and Depreciation

            We carry property and equipment, and satellites at cost, net of accumulated depreciation. The amounts we capitalize for satellites currently being constructed and those that have been successfully launched include the costs of construction, launch, launch insurance, incentive obligations and related capitalized interest. We generally compute depreciation using the straight-line method over the estimated useful lives of the assets. We amortize leasehold improvements over the lesser of the life of the asset or term of the lease.

    Goodwill and Intangible Assets

            Goodwill and intangible assets with indefinite lives are carried at historical cost and are subject to write-down, as needed, based upon an impairment analysis that we must perform at least annually, or sooner if an event occurs or circumstances change that would more likely than not result in an impairment loss. We perform our annual impairment analysis in the fourth quarter of each year. If an impairment loss results from the annual impairment test, we would record the loss as a pre-tax charge to operating income.

            We amortize other intangible assets using the straight-line method over their estimated useful lives, which range from 5 to 20 years.

    Valuation of Long-Lived Assets

            We evaluate the carrying value of long-lived assets to be held and used, other than goodwill and intangible assets with indefinite lives, when events and circumstances warrant such a review. We consider the carrying value of a long-lived asset impaired when the anticipated undiscounted future cash flow from such asset is separately identifiable and is less than its carrying value. In that event, we would recognize a loss based on the amount by which the carrying value exceeds the fair value of the long-lived asset. We determine fair value primarily using estimated future cash flows associated with the asset under review, discounted at a rate commensurate with the risk involved, or other valuation techniques. We determine losses on long-lived assets to be disposed of in a similar manner, except that we reduce the fair value for the cost of disposal.

    Foreign Currency

            The U.S. dollar is the functional currency for most of our foreign operations. We recognize gains and losses resulting from remeasurement of these operations' foreign currency denominated assets, liabilities and transactions into the U.S. dollar in the Consolidated Statements of Operations.

            We also have foreign operations where the local currency is their functional currency. Accordingly, these foreign entities translate assets and liabilities from their local currencies to U.S. dollars using year end exchange rates while income and expense accounts are translated at the average rates in effect

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    THE DIRECTV GROUP, INC.

    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)


    during the year. We record the resulting translation adjustment as part of accumulated other comprehensive income (loss), which we refer to as OCI, a separate component of stockholders' equity.

    Investments and Financial Instruments

            We maintain investments in equity securities of unaffiliated companies. We carry non-marketable equity securities at cost. We consider marketable equity securities available-for-sale and they are carried at current fair value based on quoted market prices with unrealized gains or losses (excluding other-than-temporary losses), net of taxes, reported as part of OCI. We continually review our investments to determine whether a decline in fair value below the cost basis is "other-than-temporary." We consider, among other factors: the magnitude and duration of the decline; the financial health and business outlook of the investee, including industry and sector performance, changes in technology, and operational and financing cash flow factors; and our intent and ability to hold the investment. If we judge the decline in fair value to be other-than-temporary, we write-down the cost basis of the security to fair value and recognize the amount in the Consolidated Statements of Operations as part of "Other, net" and record it as a reclassification adjustment from OCI.

            We account for investments in which we own at least 20% of the voting securities or have significant influence under the equity method of accounting. We record equity method investments at cost and adjust for the appropriate share of the net earnings or losses of the investee. We record investee losses up to the amount of the investment plus advances and loans made to the investee, and financial guarantees made on behalf of the investee.

            The carrying value of cash and cash equivalents, accounts receivable, investments and other assets, accounts payable, and amounts included in accrued liabilities and other meeting the definition of a financial instrument approximated their fair values at December 31, 2008 and 2007.

    Debt Issuance Costs

            We defer costs we incur to issue debt and amortize these costs to interest expense using the straight-line method over the term of the respective obligation.

    Share-Based Payment

            We grant restricted stock units and common stock options to our employees and directors.

            We record compensation expense equal to the fair value of stock-based awards at the date approved on a straight-line basis over the requisite service period of up to three years, reduced for estimated forfeitures and adjusted for anticipated payout percentages related to the achievement of performance targets.

    Income Taxes

            We determine deferred tax assets and liabilities based on the difference between the financial statement and tax basis of assets and liabilities, using enacted tax rates in effect for the year in which we expect the differences to reverse. We must make certain estimates and judgments in determining income tax provisions, assessing the likelihood of recovering our deferred tax assets, and evaluating tax positions.

            With the adoption of the Financial Accounting Standards Board, or FASB, Interpretation No. 48, "Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109," or FIN 48, on January 1, 2007, we now recognize a benefit in "Income tax expense" in the Consolidated

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    THE DIRECTV GROUP, INC.

    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)


    Statements of Operations for uncertain tax positions that are more-likely-than-not to be sustained upon examination, measured at the largest amount that has a greater than 50% likelihood of being realized upon settlement. Unrecognized tax benefits represent tax benefits taken or expected to be taken in income tax returns, for which the benefit has not yet been recognized in "Income tax expense" in the Consolidated Statements of Operations due to the uncertainty of whether such benefits will be ultimately realized. We recognize interest and penalties accrued related to unrecognized tax benefits in "Income tax expense" in the Consolidated Statements of Operations. Unrecognized tax benefits are recorded in "Income tax expense" in the Consolidated Statement of Operations at such time that the benefit is effectively settled.

    Advertising Costs

            We expense advertising costs primarily in "Subscriber acquisition costs" in the Consolidated Statements of Operations as incurred. Advertising expenses, net of payments received from programming content providers for marketing support, were $301 million in 2008, $261 million in 2007, and $233 million in 2006.

    Market Concentrations and Credit Risk

            We sell programming services and extend credit, in amounts generally not exceeding $200 each, to a large number of individual residential subscribers throughout the United States and most of Latin America. As applicable, we maintain allowances for anticipated losses.

    Accounting Changes

            On January 1, 2008 we adopted Statement of Financial Accounting Standards, or SFAS, No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115." SFAS No. 159 permits, but does not require, companies to report at fair value the majority of recognized financial assets, financial liabilities and firm commitments. Under this standard, unrealized gains and losses on items for which the fair value option is elected are reported in earnings at each subsequent reporting date. Our adoption of SFAS No. 159 did not have any effect on our consolidated financial statements, as we have not elected to report subject instruments at fair value.

            On January 1, 2008 we adopted SFAS No. 157, "Fair Value Measurements." SFAS No. 157 defines fair value, sets out a framework for measuring fair value under accounting principles generally accepted in the United States of America, or GAAP, and expands disclosures about fair value measurements of assets and liabilities to include disclosure about inputs used in the determination of fair value using the following three categories:

            Level 1: Quoted market prices in active markets for identical assets or liabilities.

            Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.

            Level 3: Unobservable inputs that are not corroborated by market data.

            SFAS No. 157 applies under other accounting pronouncements previously issued by the FASB that require or permit fair value measurements. Our adoption of SFAS No. 157 did not have any effect on our consolidated financial statements.

            On January 1, 2008 we adopted Emerging Issues Task Force, or EITF, Issue No. 06-1, "Accounting for Consideration Given by a Service Provider to a Manufacturer or Reseller of Equipment Necessary

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    THE DIRECTV GROUP, INC.

    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)


    for an End-Customer to Receive Service from the Service Provider." EITF No. 06-1 provides guidance to service providers regarding the proper reporting of consideration given to manufacturers or resellers of equipment necessary for an end-customer to receive its services. Depending on the circumstances, such consideration is reported as either an expense or a reduction of revenues. Our adoption of EITF No. 06-1 did not have any effect on our consolidated financial statements.

            We adopted FIN 48 on January 1, 2007, the cumulative effect of which resulted in a $5 million increase to "Accumulated deficit" in the Consolidated Balance Sheets. As of the date of adoption, our unrecognized tax benefits and accrued interest totaled $204 million, including $166 million of tax positions the recognition of which would affect the annual effective income tax rate. As of the date of adoption, we have accrued $45 million in interest and penalties as part of our liability for unrecognized tax benefits. See Note 9 below for additional information regarding unrecognized tax benefits.

            On December 31, 2007, we adopted the measurement date provision of SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R)." This provision requires the measurement of plan assets and benefit obligations as of the date of our fiscal year end and accordingly resulted in a change in our measurement date, which was previously November 30. As a result of the adoption of this provision, we recorded an adjustment of $1 million to recognize net periodic benefit cost for the one month difference to "Accumulated deficit" in the Consolidated Balance Sheets as of December 31, 2007.

            On December 31, 2006, we adopted the provisions of SFAS No. 158 that require us to recognize the funded status of our defined benefit postretirement plans in our Consolidated Balance Sheets and require that we recognize changes in the funded status of our defined benefit postretirement plans as a component of other comprehensive income, net of tax, in stockholders' equity in the Consolidated Balance Sheets, in the year in which changes occur. The adoption of the provisions to recognize the funded status of our benefit plans resulted in a $46 million decrease in "Accumulated other comprehensive income" in our Consolidated Statements of Changes in Stockholders' Equity and Comprehensive Income as of December 31, 2006.

    New Accounting Standards

            At the March 12, 2008 EITF meeting, the SEC Observer announced revisions to Topic D-98 "Classification and Measurement of Redeemable Securities", which provides SEC registrants guidance on the financial statement classification and measurement of equity securities that are subject to mandatory redemption requirements or whose redemption is outside the control of the issuer. The revised Topic D-98 requires that redeemable minority interests, such as Globo Comunicacoes e Participacoes S.A.'s, or Globo's, redeemable interest described in Note 19 to the Notes to the Consolidated Financial Statements that are redeemable at the option of the holder should be recorded outside of permanent equity at fair value, and the redeemable minority interests should be adjusted to their fair value at each balance sheet date. Adjustments to the carrying amount of a noncontrolling interest from the application of Topic D-98 are recorded to retained earnings (or additional paid-in-capital in the absence of retained earnings). We will apply this guidance in our Consolidated Financial Statements beginning January 1, 2009, which will result in us recording the fair value of our redeemable minority interest as of January 1, 2009 with a corresponding adjustment to "Additional paid in capital" in the Consolidated Balance Sheets. Had we adopted this guidance as of December 31, 2008, we would have recorded a $222 million increase to "Minority interest" with a corresponding decrease to "Common stock and additional paid-in-capital" in the Consolidated Balance Sheets.

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    THE DIRECTV GROUP, INC.

    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

            In December 2007, the FASB issued SFAS No. 160 "Noncontrolling Interests in Consolidated Financial Statements—an amendment to ARB No. 51.", which establishes standards of accounting and reporting of noncontrolling interests in subsidiaries, currently known as minority interests, in consolidated financial statements, provides guidance on accounting for changes in the parent's ownership interest in a subsidiary and establishes standards of accounting of the deconsolidation of a subsidiary due to the loss of control. SFAS No. 160 requires an entity to present minority interests as a component of equity. Additionally, SFAS No. 160 requires an entity to present net income and consolidated comprehensive income attributable to the parent and the minority interest separately on the face of the Consolidated Statements of Operations. SFAS No. 160 is required to be applied prospectively, except for the presentation and disclosure requirements, which must be applied retrospectively for all periods presented. The adoption of SFAS No. 160 on January 1, 2009, as required, will only affect the presentation of the minority interest in our Consolidated Statements of Operations.

            In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business Combinations." SFAS No. 141R will require the acquiring entity to record 100% of all assets and liabilities acquired, including goodwill and any non-controlling interest, generally at their fair values for all business combinations, whether partial, full or step acquisitions. Under SFAS No. 141R certain contingent assets and liabilities, as well as contingent consideration, will also be required to be recognized at fair value on the date of acquisition and acquisition related transaction and restructuring costs will be expensed. Additionally, SFAS No. 141R requires disclosures about the nature and financial effect of the business combination and also changes the accounting for certain income tax assets recorded in purchase accounting. The adoption of SFAS No. 141R as required, on January 1, 2009, will change the way we account for adjustments to deferred tax asset valuation allowances recorded in purchase accounting for prior business combinations and will change the accounting for all business combinations consummated after January 1, 2009.

    Note 3: Accounts Receivable, Net

            The following table sets forth the amounts recorded for "Accounts receivable, net" in our Consolidated Balance Sheets as of December 31:

     
    		 
    2008
    		 
    2007
    		 
     
    		 (Dollars in Millions)
    		 

    Subscriber

    		 $918 $925 

    Trade and other

    		  555  666 
          

    Subtotal

    		  1,473  1,591 

    Less: Allowance for doubtful accounts

    		  (50) (56)
          
     

    Accounts receivable, net

    		 $1,423 $1,535 
          

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    THE DIRECTV GROUP, INC.

    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

    Note 4: Satellites, Net and Property and Equipment, Net

            The following table sets forth the amounts recorded for "Satellites, net" and "Property and equipment, net" in our Consolidated Balance Sheets at December 31:

     
    		 
    Estimated Useful Lives (years)
    		 
    2008
    		 
    2007
    		 
     
    		 (Dollars in Millions)
    		 

    Satellites

    		  10-16 $2,956 $2,163 

    Satellites under construction

    		  —  292  474 
             

    Total

    		     3,248  2,637 

    Less: Accumulated depreciation

    		     (772) (611)
             
     

    Satellites, net

    		    $2,476 $2,026 
             

    Land and improvements

    		  9-30 $37 $34 

    Buildings and leasehold improvements

    		  2-40  342  301 

    Machinery and equipment

    		  3-23  3,211  2,821 

    Subscriber leased set-top receivers

    		  3-7  4,853  3,731 

    Construction in-progress

    		  —  271  365 
             

    Total

    		     8,714  7,252 

    Less: Accumulated depreciation

    		     (4,543) (3,445)
             
     

    Property and equipment, net

    		    $4,171 $3,807 
             

            We capitalized interest costs of $18 million in 2008, $51 million in 2007, and $55 million in 2006 as part of the cost of our property and satellites under construction. Depreciation expense was $1,907 million in 2008, $1,264 million in 2007, and $664 million in 2006.

            On March 1, 2006, DIRECTV U.S. introduced a new set-top receiver lease program. Prior to March 1, 2006, most set-top receivers provided to new and existing DIRECTV U.S. subscribers were immediately expensed upon activation as a subscriber acquisition or upgrade and retention cost in the Consolidated Statements of Operations. Subsequent to the introduction of the lease program, we lease most set-top receivers provided to new and existing subscribers, and therefore capitalize the set-top receivers in "Property and equipment, net" in the Consolidated Balance Sheets. We depreciate capitalized set-top receivers over a three year estimated useful life and include the amount of set-top receivers capitalized each period in "Cash paid for property and equipment" in the Consolidated Statements of Cash Flows.

            The following table sets forth the amount of DIRECTV U.S. set-top receivers we capitalized, and depreciation expense we recorded, under the lease program for each of the periods presented:

    Capitalized subscriber leased equipment: 
    Years ended December 31,
    		 
     
    2008
    		 
    2007
    		 
    2006
    		 
     
    		 (Dollars in Millions)
    		 

    Subscriber leased equipment—subscriber acquisitions

    		 $599 $762 $599 

    Subscriber leased equipment—upgrade and retention

    		  537  774  473 
            

    Total subscriber leased equipment capitalized

    		 $1,136 $1,536 $1,072 
            

    Depreciation expense—subscriber leased equipment

    		 $1,100 $645 $147 

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    THE DIRECTV GROUP, INC.

    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

    Note 5: Goodwill and Intangible Assets

            The following table sets forth the changes in the carrying amounts of "Goodwill" in the Consolidated Balance Sheets by segment for the years ended December 31, 2008 and 2007:

     
    		 
    DIRECTV U.S.
    		 
    DIRECTV
    Latin America
    		 
    Total
    		 
     
    		 (Dollars in Millions)
    		 

    Balance as of January 1, 2007

    		 $3,032 $483 $3,515 

    Acquisition of Darlene interest in DLA LLC

    		  —  187  187 

    Sky Brazil purchase price allocation

    		  —  (31) (31)

    Other

    		  —  (2) (2)
            

    Balance as of December 31, 2007

    		  3,032  637  3,669 

    Acquisition related to home service provider business

    		  157  —  157 

    Sky Brazil deferred income tax valuation allowance

    		  —  (73) (73)
            

    Balance as of December 31, 2008

    		 $3,189 $564 $3,753 
            

            The following table sets forth the components for "Intangible assets, net" in the Consolidated Balance Sheets at:

     
    		  
    		 
    December 31, 2008
    		 
    December 31, 2007
    		 
     
    		 
    Estimated
    Useful Lives
    (years)
    		 
    Gross
    Amount
    		 
    Accumulated
    Amortization
    		 
    Net
    Amount
    		 
    Gross
    Amount
    		 
    Accumulated
    Amortization
    		 
    Net
    Amount
    		 
     
    		  
    		 (Dollars in Millions)
    		 

    Orbital slots

    		  Indefinite $432    $432 $432    $432 

    72.5° WL Orbital license

    		  5  208 $171  37  208 $132  76 

    Subscriber related

    		  5-10  1,697  1,255  442  1,697  942  755 

    Dealer network

    		  15  130  79  51  130  71  59 

    Trade name and other

    		  10-20  102  9  93  95  5  90 

    Distribution rights

    		  7  334  217  117  334  169  165 
                     

    Total intangible assets

    		    $2,903 $1,731 $1,172 $2,896 $1,319 $1,577 
                     

            Amortization expense of intangible assets was $412 million in 2008 and $419 million in 2007 and $369 million in 2006.

            Estimated amortization expense for intangible assets in each of the next five years and thereafter is as follows: $350 million in 2009; $152 million in 2010; $97 million in 2011; $55 million in 2012; $17 million in 2013 and $69 million thereafter.

            We performed our annual impairment tests for goodwill and orbital slots in the fourth quarters of 2008, 2007, and 2006. The estimated fair values for each reporting unit and the orbital slots exceeded our carrying values, and accordingly, no impairment losses were recorded during 2008, 2007, or 2006.

    Note 6: Investments

    Equity Method Investments

            We have investments in companies that we account for under the equity method of accounting totaling $667 million as of December 31, 2008 and $551 million as of December 31, 2007.

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    THE DIRECTV GROUP, INC.

    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

            We paid cash of $96 million in 2008, $13 million in 2007 and $381 million in 2006 to acquire interests in companies we account for under the equity method of accounting. As discussed in Note 17, we acquired a 41% interest in Sky Mexico in 2006. The book value of our investment in Sky Mexico was $537 million at December 31, 2008 and $505 million at December 31, 2007.

            The following table sets forth equity in earnings of our 41% interest in Sky Mexico for the periods presented:

     
    		 
    Years Ended December 31,
    		 
     
    		 
    2008
    		 
    2007
    		 
    2006
    		 
     
    		 (Dollars in Millions)
    		 

    Equity in earnings of Sky Mexico

    		 $63 $41 $18 

            We received cash dividends of $35 million in 2008 from companies that we account for under the equity method.

            In January 2006, we completed the sale of our 50% interest in HNS LLC to SkyTerra Communications, Inc. and resolved a working capital adjustment from a prior transaction with SkyTerra in exchange for $110 million in cash, which resulted in our recording a gain of $14 million related to the sale, in addition to equity earnings of HNS LLC of $11 million in "Other, net" in the Consolidated Statements of Operations.

    Other Investments

            We had investments in marketable equity securities of $23 million as of December 31, 2008 and $56 million as of December 31, 2007, which were stated at current fair value and classified as available-for-sale.

            Accumulated unrealized gains, net of taxes, included as part of accumulated other comprehensive income were $1 million in 2008, $21 million in 2007 and $9 million in 2006.

    Note 7: Accounts Payable and Accrued Liabilities; Other Liabilities and Deferred Credits

            The following represent significant components of "Accounts payable and accrued liabilities" in our Consolidated Balance Sheets as of December 31:

     
    		 
    2008
    		 
    2007
    		 
     
    		 (Dollars in Millions)
    		 

    Programming costs

    		 $1,640 $1,506 

    Accounts payable

    		  433  447 

    Property and income taxes

    		  161  154 

    Payroll and employee benefits

    		  165  139 

    Interest payable

    		  45  26 

    Other

    		  671  760 
          
      

    Total accounts payable and accrued liabilities

    		 $3,115 $3,032 
          

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    THE DIRECTV GROUP, INC.

    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

            The following represent significant components of "Other liabilities and deferred credits" in our Consolidated Balance Sheets as of December 31:

     
    		 
    2008
    		 
    2007
    		 
     
    		 (Dollars in Millions)
    		 

    Obligations under capital leases

    		 $542 $43 

    Other accrued taxes

    		  428  343 

    Programming costs

    		  251  368 

    Pension and other postretirement benefits

    		  179  75 

    Deferred credits

    		  122  213 

    Other

    		  227  360 
          
      

    Total other liabilities and deferred credits

    		 $1,749 $1,402 
          

    Note 8: Debt

            The following table sets forth our outstanding debt:

     
    		 
    Interest Rates at
    December 31, 2008
    		 
    December 31,
    		 
     
    		 
    2008
    		 
    2007
    		 
     
    		  
    		 (Dollars in Millions)
    		 

    8.375% senior notes due in 2013

    		  8.375%$910 $910 

    6.375% senior notes due in 2015

    		  6.375% 1,000  1,000 

    7.625% senior notes due in 2016

    		  7.625% 1,500  — 

    Senior secured credit facility, net of unamortized discount of $9 million as of December 31, 2008

    		  3.165% 2,421  1,483 

    Unamortized bond premium

    		  —  2  2 
             
     

    Total debt

    		     5,833  3,395 

    Less: Current portion of long-term debt

    		     (108) (48)
             
     

    Long-term debt

    		    $5,725 $3,347 
             

    2008 Financing Transactions

            In May 2008, DIRECTV U.S. completed financing transactions that included the issuance of senior notes and an amendment to its existing senior secured credit facility as discussed below. We incurred $20 million of debt issuance costs in connection with these transactions.

            DIRECTV U.S. issued $1,500 million in senior notes due in 2016 in a private placement transaction. The eight-year notes bear interest at 7.625%. Principal on the senior notes is payable upon maturity, while interest is payable semi-annually commencing November 15, 2008. The senior notes have been fully and unconditionally guaranteed, jointly and severally, by substantially all of DIRECTV U.S.' current and certain of its future domestic subsidiaries on a senior unsecured basis. On November 11, 2008, we completed an exchange offer in which holders of substantially all of the outstanding principal amount of the senior notes exchanged the original senior notes for registered notes with identical terms, except that the registered notes are registered under the Securities Act of 1933, as amended, and do not bear the legends restricting their transfer.

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    THE DIRECTV GROUP, INC.

    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

            DIRECTV U.S. also amended its senior secured credit facility to include a new $1,000 million Term Loan C, which was issued at a 1% discount, resulting in $990 million of proceeds. Initially, borrowings under Term Loan C bear interest at 5.25%, however the rate is variable based on changes in the London InterBank Offered Rate, or LIBOR. The interest rate may be increased or decreased under certain conditions. The Term Loan C has a final maturity of April 13, 2013, and we began making quarterly principal payments totaling 1% annually on September 30, 2008. The senior secured credit facility is secured by substantially all of DIRECTV U.S.' assets and the assets of its current and certain of its future domestic subsidiaries and is fully and unconditionally guaranteed, jointly and severally, by substantially all of DIRECTV U.S.' current and certain of its future domestic subsidiaries.

            Notes Payable.    All of our senior notes were issued by DIRECTV U.S. and have been registered under the Securities Act of 1933, as amended. The 8.375% senior notes, 6.375% senior notes and 7.625% senior notes are unsecured and have been fully and unconditionally guaranteed, jointly and severally, by substantially all of DIRECTV U.S.' assets. Principal on the senior notes is payable upon maturity, while interest is payable semi-annually.

            The fair value of our 8.375% senior notes was approximately $904 million at December 31, 2008 and approximately $948 million at December 31, 2007. The fair value of our 6.375% senior notes was approximately $911 million at December 31, 2008 and approximately $962 million at December 31, 2007. The fair value of our 7.625% senior notes was approximately $1,451 million at December 31, 2008. We calculated the fair values based on quoted market prices of our senior notes, which is a Level 1 input under SFAS No. 157, on those dates.

            Credit Facility.    At December 31, 2008, DIRECTV U.S.' senior secured credit facility consisted of a $463 million six-year Term Loan A, a $972 million eight-year Term Loan B, a $986 million five-year Term Loan C and a $500 million undrawn six-year revolving credit facility. The Term Loan A, Term Loan B and Term Loan C components of the senior secured credit facility currently bear interest at a rate equal to the London InterBank Offered Rate, or LIBOR, plus 0.75%, 1.50% and 2.25%, respectively. In addition, we pay a commitment fee of 0.175% per year for the unused commitment under the revolving credit facility. The interest rate and commitment fee may be increased or decreased under certain conditions. The senior secured credit facility is secured by substantially all of DIRECTV U.S.' assets and is fully and unconditionally guaranteed, jointly and severally by substantially all of DIRECTV U.S.' material domestic subsidiaries.

            Our notes payable and credit facility mature as follows: $108 million in 2009, $308 million in 2010, $108 million in 2011, $20 million in 2012, $2,796 million in 2013 and $2,500 million thereafter. These amounts do not reflect potential prepayments that may be required under our senior secured credit facility, which could result from a computation of excess cash flows that we may be required to make at each year end under the credit agreement. We were not required to make a prepayment for the years ended December 31, 2008, 2007, or 2006. The amount of interest accrued related to our outstanding debt was $45 million at December 31, 2008 and $26 million at December 31, 2007.

            Sky Brazil Bank Loan.    As a result of our acquisition of Sky Brazil, we assumed Sky Brazil's $210 million U.S. dollar denominated variable rate bank loan due in August 2007. In January 2007, we paid $210 million to the lending banks, who in turn assigned the loan to a wholly-owned subsidiary of The DIRECTV Group. As a result, this loan is no longer outstanding on a consolidated basis.

            Covenants and Restrictions.    The senior secured credit facility requires DIRECTV U.S. to comply with certain financial covenants. The senior notes and the senior secured credit facility also include covenants that restrict DIRECTV U.S.' ability to, among other things, (i) incur additional indebtedness,

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    THE DIRECTV GROUP, INC.

    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)


    (ii) incur liens, (iii) pay dividends or make certain other restricted payments, investments or acquisitions, (iv) enter into certain transactions with affiliates, (v) merge or consolidate with another entity, (vi) sell, assign, lease or otherwise dispose of all or substantially all of its assets, and (vii) make voluntary prepayments of certain debt, in each case subject to exceptions as provided in the credit agreement and senior notes indentures. Should DIRECTV U.S. fail to comply with these covenants, all or a portion of its borrowings under the senior notes and senior secured credit facility could become immediately payable and its revolving credit facility could be terminated. At December 31, 2008, DIRECTV U.S. was in compliance with all such covenants. The senior notes and senior secured credit facility also provide that the borrowings may be required to be prepaid if certain change-in-control events occur. In September 2008, Liberty Media became the majority owner of our outstanding common stock. There was no ratings decline for the senior notes associated with that event, and DIRECTV U.S. was not required either to offer to redeem any of the senior notes pursuant to their respective indentures or to prepay any of the borrowings under the senior secured credit facility.

            Restricted Cash.    Restricted cash of $15 million as of December 31, 2008 and $5 million as of December 31, 2007 was included as part of "Prepaid expenses and other" in our Consolidated Balance Sheets. These amounts secure our letter of credit obligations. Restrictions on the cash will be removed as the letters of credit expire.

    Note 9: Income Taxes

            We base our income tax expense or benefit on reported "Income from continuing operations before income taxes and minority interests." Deferred income tax assets and liabilities reflect the impact of temporary differences between the amounts of assets and liabilities recognized for financial reporting purposes and such amounts recognized for tax purposes, as measured by applying currently enacted tax laws.

            Our income tax expense consisted of the following for the years ended December 31:

     
    		 
    2008
    		 
    2007
    		 
    2006
    		 
     
    		 (Dollars in Millions)
    		 

    Current tax expense:

    		          
     

    U.S. federal

    		 $(543)$(450)$(20)
     

    Foreign

    		  (128) (73) (16)
     

    State and local

    		  (72) (103) (32)
            
      

    Total

    		  (743) (626) (68)
            

    Deferred tax (expense) benefit:

    		          
     

    U.S. federal

    		  (210) (285) (704)
     

    Foreign

    		  97  5  — 
     

    State and local

    		  (8) (37) (94)
            
      

    Total

    		  (121) (317) (798)
            
      

    Total income tax expense

    		 $(864)$(943)$(866)
            

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    THE DIRECTV GROUP, INC.

    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

            "Income from continuing operations before income taxes and minority interests" included the following components for the years ended December 31:

     
    		 
    2008
    		 
    2007
    		 
    2006
    		 
     
    		 (Dollars in Millions)
    		 

    U.S. income

    		 $1,981 $2,154 $2,162 

    Foreign income

    		  490  234  137 
            
      

    Total

    		 $2,471 $2,388 $2,299 
            

            Our income tax expense was different than the amount computed using the U.S. federal statutory income tax rate for the reasons set forth in the following table for the years ended December 31:

     
    		 
    2008
    		 
    2007
    		 
    2006
    		 
     
    		 (Dollars in Millions)
    		 

    Expected expense at U.S. federal statutory income tax rate

    		 $(865)$(836)$(804)

    U.S. state and local income tax expense, net of federal benefit

    		  (73) (91) (82)

    Change in unrecognized tax benefits

    		  (18) (18) — 

    Tax basis differences attributable to divestitures

    		  —  —  25 

    Minority interests in partnership earnings

    		  26  4  5 

    Foreign tax (expense) benefit, net of tax deduction

    		  27  (14) (9)

    Change in valuation allowance

    		  12  5  1 

    Tax credits

    		  32  4  — 

    Other

    		  (5) 3  (2)
            
      

    Total income tax expense

    		 $(864)$(943)$(866)
            

            Temporary differences and carryforwards that gave rise to deferred tax assets and liabilities at December 31 were as follows:

     
    		 
    2008
    		 
    2007
    		 
     
    		 
    Deferred
    Tax
    Assets
    		 
    Deferred
    Tax
    Liabilities
    		 
    Deferred
    Tax
    Assets
    		 
    Deferred
    Tax
    Liabilities
    		 
     
    		 (Dollars in Millions)
    		 

    Accruals and advances

    		 $278 $67 $300 $132 

    Prepaid expenses

    		  —  29  —  40 

    State taxes

    		  31  —  23  — 

    Depreciation, amortization and asset impairment charges

    		  —  273  —  193 

    Foreign net operating loss and tax credit carryforwards

    		  643  —  715  — 

    Programming contract liabilities

    		  162  —  188  — 

    Unrealized foreign exchange gains or losses

    		  —  59  —  106 

    Tax basis differences in investments and affiliates

    		  84  705  58  682 

    Other

    		  6  6  3  6 
              

    Subtotal

    		  1,204  1,139  1,287  1,159 

    Valuation allowance

    		  (511) —  (605) — 
              
      

    Total deferred taxes

    		 $693 $1,139 $682 $1,159 
              

            As of December 31, 2008, we had $10 million of long-term deferred tax assets, recorded in "Investments and other assets" in the Consolidated Balance Sheets.

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    THE DIRECTV GROUP, INC.

    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

            We assessed the deferred tax assets for the respective periods for recoverability and, where applicable, we recorded a valuation allowance to reduce the total deferred tax assets to an amount that will, more likely than not, be realized in the future.

            The valuation allowance balance of $511 million at December 31, 2008 and $605 million at December 31, 2007, are primarily attributable to the unused foreign operating losses and unused capital losses, both of which are available for carry forward. For the year ended December 31, 2008, the decrease in the valuation allowance was primarily attributable to the realization of an $87 million deferred tax asset for Brazilian net operating loss carryforwards. The reversal of the valuation allowance was based on management's evaluation that it is more likely than not that Brazilian net operating loss carryforwards which have not been previously realized will be utilized as a result of the recent profitability of the Brazilian operations and its financial projections. $22 million of the valuation allowance reversal was attributable to the minority interest in the Brazilian operations and was reported as a reduction in the foreign income tax expense. Additionally, $65 million of the valuation allowance reversal was reported as a reduction to both future U.S. tax credits and goodwill that was recognized upon our acquisition of Sky Brazil.

            Although realization is not assured, we have concluded that it is more likely than not that our unreserved deferred tax assets will be realized in the ordinary course of operations based on available positive and negative evidence, including scheduling of deferred tax liabilities and projected income from operating activities. The underlying assumptions we use in forecasting future taxable income require significant judgment and take into account our recent performance.

            As of December 31, 2008, we have approximately $1.7 billion of foreign net operating losses that are primarily attributable to operations in Brazil with varying expiration dates, foreign tax credits of $45 million that expire between 2009 and 2017, and state research tax credits of approximately $40 million that can be carried forward indefinitely.

            No income tax provision has been made for the portion of undistributed earnings of foreign subsidiaries deemed permanently reinvested that amounted to approximately $269 million in 2008. It is not practicable to determine the amount of the unrecognized deferred tax liability related to the investments in foreign subsidiaries.

            A reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits is as follows:

     
    		 
    (Dollars in Millions)
    		 

    Gross unrecognized tax benefits at January 1, 2007

    		 $159 
     

    Increases in tax positions for prior years

    		  102 
     

    Increases in tax positions for the current year

    		  34 
     

    Settlements

    		  (4)
        

    Gross unrecognized tax benefits at December 31, 2007

    		  291 
     

    Increases in tax positions for prior years

    		  75 
     

    Increases in tax positions for the current year

    		  26 
     

    Statute expiration

    		  (38)
     

    Settlements

    		  9 
        

    Gross unrecognized tax benefits at December 31, 2008

    		 $363 
        

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    THE DIRECTV GROUP, INC.

    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

            As of December 31, 2008, our unrecognized tax benefits totaled $425 million, including accrued interest of $62 million. If our tax positions are ultimately sustained, approximately $207 million of the unrecognized tax benefits would be recognized as a reduction in our annual effective income tax rate.

            We recorded $16 million of interest and penalties in "Income tax expense" in the Consolidated Statements of Operations during the year ended December 31, 2008 for unrecognized tax benefits.

            We file numerous consolidated and separate income tax returns in the U.S. federal jurisdiction and in many state and foreign jurisdictions. For U.S. federal tax purposes, the tax years 2003 through 2008 remain open to examination. The California tax years 1994 through 2008 remain open to examination and the income tax returns in the other state and foreign tax jurisdictions in which we have operations are generally subject to examination for a period of 3 to 5 years after filing of the respective return.

            We anticipate that the examination and court proceedings for certain state taxing jurisdictions will conclude in the next twelve months resulting in an estimated reduction in our unrecognized tax benefits of approximately $35 million, $30 million of which relates to discontinued operations. We do not anticipate that other changes to the total unrecognized tax benefits in the next twelve months will have a significant effect on our consolidated financial statements.

    Note 10: Capital Lease Obligations

    Satellite Leases

            During the first quarter of 2008, Sky Brazil began broadcasting its service on a new satellite, IS 11, pursuant to a satellite transponder capacity agreement, which we are accounting for as a capital lease. The present value of the lease payments at the inception of the 15 year lease term was $247 million. The capitalized value of the satellite has been included in "Satellites, net" in the Consolidated Balance Sheets. The capitalized lease obligations are included in "Accounts payable and accrued liabilities" and "Other liabilities and deferred credits" in the Consolidated Balance Sheets.

            During the third quarter of 2008, DTVLA amended its satellite transponder capacity agreement for the GIIIC satellite, which provides broadcast services to PanAmericana, and was previously classified as an operating lease. The extension of the lease term to December 2020 triggered a reassessment of the lease classification and we determined that we should change the classification of the amended agreement to a capital lease. The present value of the lease payments at the inception of the lease renewal was $333 million. The capitalized value of the satellite is included in "Satellites, net" and the capitalized lease obligation is included in "Accounts payable and accrued liabilities" and "Other liabilities and deferred credits" in the Consolidated Balance Sheets.

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    THE DIRECTV GROUP, INC.

    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

            The following table sets forth total minimum lease payments under capital leases along with the present value of the net minimum lease payments as of December 31, 2008:

     
    		 
    (Dollars in Millions)
    		 

    2009

    		 $83 

    2010

    		  80 

    2011

    		  77 

    2012

    		  76 

    2013

    		  75 

    Thereafter

    		  586 
        

    Total minimum lease payments

    		  977 

    Less: Amount representing interest

    		  393 
        

    Present value of net minimum lease payments

    		 $584 
        

            Assets held under capitalized leases are included in Satellites, net and Property and Equipment, net in our Consolidated Balance Sheets. We had the following assets held under capital leases as of December 31:

     
    		 
    2008
    		 
    2007
    		 
     
    		 (Dollars in Millions)
    		 

    Satellites under capital leases

    		 $533 $44 

    Less: Accumulated amortization

    		  (20) (24)
          

    Satellites, net under capital leases

    		 $513 $20 
          

    Property and equipment under capital leases

    		 $27 $11 

    Less: Accumulated amortization

    		  (4) (1)
          

    Property and equipment, net under capital leases

    		 $23 $10 
          

            We paid interest for capital leases of $27 million in 2008, $4 million in 2007 and $2 million in 2006.

    Note 11: Pension and Other Postretirement Benefit Plans

            Most of our employees are eligible to participate in our funded non-contributory defined benefit pension plan, which provides defined benefits based on either years of service and final average salary, or eligible compensation while employed by the company. Additionally, we maintain a funded contributory defined benefit plan for employees who elected to participate prior to 1991, and an unfunded, nonqualified pension plan for certain eligible employees. For participants in the contributory pension plan, we also maintain a postretirement benefit plan for those eligible retirees to participate in health care and life insurance benefits generally until they reach age 65. Participants may become eligible for these health care and life insurance benefits if they retire from our company between the ages of 55 and 65. The health care plan is contributory with participants' contributions subject to adjustment annually; the life insurance plan is non-contributory.

            On December 31, 2007, we adopted the measurement date provision of SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R)." This provision requires the measurement of plan

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    THE DIRECTV GROUP, INC.

    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)


    assets and benefit obligations as of the date of our fiscal year end. This required a change in our measurement date, which was previously November 30. See Note 2 for additional information.

            The components of the pension benefit obligation and the other postretirement benefit obligation, including amounts recognized in the Consolidated Balance Sheets, are shown below for the years ended December 31:

     
    		 
    Pension Benefits
    		 
    Other Postretirement
    Benefits
    		 
     
    		 
    2008
    		 
    2007
    		 
    2008
    		 
    2007
    		 
     
    		 (Dollars in Millions)
    		 

    Change in Net Benefit Obligation

    		             

    Net benefit obligation at beginning of year

    		 $430 $468 $24 $28 

    Service cost

    		  16  18  —  — 

    Interest cost

    		  27  28  1  1 

    Plan participants' contributions

    		  1  1  —  — 

    Actuarial loss (gain)

    		  29  (27) —  (3)

    Benefits paid

    		  (51) (58) (3) (2)
              

    Net benefit obligation at end of year

    		  452  430  22  24 
              

    Change in Plan Assets

    		             

    Fair value of plan assets at beginning of year

    		  368  393  —  — 

    Actual (loss) return on plan assets

    		  (85) 22  —  — 

    Employer contributions

    		  51  11  3  2 

    Benefits paid

    		  (51) (58) (3) (2)
              

    Fair value of plan assets at end of year

    		  283  368  —  — 
              

    Funded status at end of year

    		 $(169)$(62)$(22)$(24)
              

    Amounts recognized in the consolidated balance sheets consist of:

    		             
      

    Investments and other assets

    		 $— $2 $— $— 
      

    Accounts payable and accrued liabilities

    		  (9) (10) (3) (3)
      

    Other liabilities and deferred credits

    		  (160) (54) (19) (21)
      

    Deferred tax assets

    		  79  26  (1) (1)
      

    Accumulated other comprehensive loss

    		  129  42  (1) (1)

    Amounts recognized in the accumulated other comprehensive loss consist of:

    		             
      

    Unamortized net amount resulting from changes in defined benefit plan experience and actuarial assumptions, net of taxes

    		 $125 $37 $— $— 
      

    Unamortized amount resulting from changes in defined benefit plan provisions, net of taxes

    		  4  5  (1) (1)
              
        

    Total

    		 $129 $42 $(1)$(1)
              

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    THE DIRECTV GROUP, INC.

    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

            We estimate that the following amounts will be amortized from accumulated other comprehensive income into net periodic benefit cost during the year ending December 31, 2009:

     
    		 
    Pension
    Benefits
    		 
    Other
    Postretirement
    Benefits
    		 
     
    		 (Dollars in Millions)
    		 

    Expense resulting from changes in plan experience and actuarial assumptions

    		 $7  — 

    Expense (benefit) resulting from changes in plan provisions

    		  1 $(1)

            The accumulated benefit obligation for all pension plans was $415 million as of December 31, 2008 and $396 million as of December 31, 2007.

            Information for pension plans with an accumulated benefit obligation in excess of plan assets at December 31:

     
    		 
    2008
    		 
    2007
    		 
     
    		 (Dollars in Millions)
    		 

    Accumulated benefit obligation

    		 $415 $49 

    Fair value of plan assets

    		  283  — 

            Information for pension plans with a projected benefit obligation in excess of plan assets at December 31:

     
    		 
    2008
    		 
    2007
    		 
     
    		 (Dollars in Millions)
    		 

    Projected benefit obligation

    		 $452 $64 

    Fair value of plan assets

    		  283  — 

            Components of net periodic benefit cost for the years ended December 31:

     
    		 
    Pension Benefits
    		 
    Other Postretirement Benefits
    		 
     
    		 
    2008
    		 
    2007
    		 
    2006
    		 
    2008
    		 
    2007
    		 
    2006
    		 
     
    		 (Dollars in Millions)
    		 

    Components of net periodic benefit cost

    		                   

    Benefits earned during the year

    		 $16 $18 $14 $— $— $— 

    Interest accrued on benefits earned in prior years

    		  27  28  27  1  1  2 

    Expected return on plan assets

    		  (30) (33) (29) —  —  — 

    Amortization components

    		                   
      

    Amount resulting from changes in plan provisions

    		  1  1  1  —  (1) (1)
      

    Net amount resulting from changes in plan experience and actuarial assumptions

    		  4  6  5  —  —  — 
                  

    Net periodic benefit cost

    		 $18 $20 $18 $1 $— $1 
                  

    Additional information

    		                   

    Increase in minimum liability included in other comprehensive income, net of taxes

    		 $— $— $24 $— $— $— 

    IV-29

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    THE DIRECTV GROUP, INC.

    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

            Net periodic pension benefit costs for 2007 includes one month of expense that was recorded as an adjustment to "Accumulated deficit" in the Consolidated Balance Sheets ($1 million after tax) related to the adoption of the measurement date provisions of SFAS No. 158 discussed in Note 2.

    Assumptions

            Weighted-average assumptions used to determine benefit obligations at December 31:

     
    		 
    Pension Benefits
    		 
    Other Postretirement
    Benefits
    		 
     
    		 
    2008
    		 
    2007
    		 
    2008
    		 
    2007
    		 

    Discount rate—Qualified Plans

    		  6.06% 6.22% 5.88% 5.76%

    Discount rate—Non-Qualified Plans

    		  6.04% 6.24% —  — 

    Rate of compensation increase

    		  4.00% 4.00% 4.00% 4.00%

            Weighted-average assumptions used to determine net periodic benefit cost for the years ended December 31:

     
    		 
    Pension Benefits
    		 
    Other Postretirement
    Benefits
    		 
     
    		 
    2008
    		 
    2007
    		 
    2006
    		 
    2008
    		 
    2007
    		 
    2006
    		 

    Discount rate—Qualified Plan

    		  6.22% 5.67% 5.78% 5.76% 5.43% 5.46%

    Discount rate—Non-Qualified Plans

    		  6.24% 5.69% 5.74% —  —  — 

    Expected long-term return on plan assets

    		  8.75% 8.75% 8.75% —  —  — 

    Rate of compensation increase

    		  4.00% 4.00% 4.00% 4.00% 4.00% 4.00%

            We base our expected long-term return on plan assets assumption on a periodic review and modeling of the plans' asset allocation and liability structure over a long-term horizon. Expectations of returns for each asset class are the most important of the assumptions used in the review and modeling and are based on comprehensive reviews of historical data and economic/financial market theory.

            A hypothetical 0.25% decrease in our discount rate would have had the effect of increasing our 2008 pension expense by approximately $1 million and our projected benefit obligation by approximately $12 million. A hypothetical 0.25% decrease in our expected return on plan assets would have had the effect of increasing our 2008 pension expense by approximately $1 million.

            The following table provides assumed health care costs trend rates:

     
    		 
    2008
    		 
    2007
    		 

    Health care cost trend rate assumed for next year

    		  8.00% 8.00%

    Rate to which the cost trend rate is assumed to decline (ultimate trend rate)

    		  5.00% 5.00%

    Year that trend rate reaches the ultimate trend rate

    		  2015  2011 

            A one-percentage-point change in assumed health care cost trend rates would have the following effects:

     
    		 
    1-Percentage
    Point Increase
    		 
    1-Percentage
    Point Decrease
    		 
     
    		 (Dollars in Millions)
    		 

    Effect on total of service and interest cost components

    		  —  — 

    Effect on postretirement benefit obligation

    		 $2 $(1)

    IV-30

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    THE DIRECTV GROUP, INC.

    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

    Plan Assets

            Our target asset allocation for 2008 and actual pension plan weighted average asset allocations at December 31, 2008 and 2007, by asset categories, are as follows:

     
    		 
    Target
    Allocation
    		 
    Percentage of
    Plan Assets
    at December 31,
    		 
     
    		 
    2009
    		 
    2008
    		 
    2007
    		 

    Equity securities

    		  40-56% 47% 53%

    Debt securities

    		  24-40% 40% 36%

    Real estate

    		  0-10% 3% 4%

    Other

    		  0-10% 10% 7%
             

    Total

    		     100% 100%
             

            Our investment policy includes various guidelines and procedures designed to ensure we invest assets in a manner necessary to meet expected future benefits earned by participants. The investment guidelines consider a broad range of economic conditions. Central to the policy are target allocation ranges (shown above) by major asset categories.

            The objectives of the target allocations are to maintain investment portfolios that diversify risk through prudent asset allocation parameters, achieve asset returns that meet or exceed the plans' actuarial assumptions, and achieve asset returns that are competitive with like institutions employing similar investment strategies.

            The investment policy is periodically reviewed by us and a designated third-party fiduciary for investment matters. We establish and administer the policy in a manner so as to comply at all times with applicable government regulations.

            There were no shares of our common stock included in plan assets at December 31, 2008 and 2007.

    Cash Flows

      Contributions

            We expect to contribute approximately $22 million to our qualified pension plans and $11 million to our nonqualified pension plans in 2009.

    IV-31

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    THE DIRECTV GROUP, INC.

    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

    Estimated Future Benefit Payments

            We expect the following benefit payments, which reflect expected future service, as appropriate, to be paid by the plans during the years ending December 31:

     
    		 
    Estimated Future Benefit Payments
    		 
     
    		 
    Pension Benefits
    		 
    Other Postretirement
    Benefits
    		 
     
    		 (Dollars in Millions)
    		 

    2009

    		 $43 $3 

    2010

    		  36  3 

    2011

    		  31  2 

    2012

    		  31  2 

    2013

    		  31  2 

    2014-2017

    		  179  10 

            We maintain 401(k) plans for qualified employees. We match a portion of our employee contributions and our match amounted to $12 million in 2008, $10 million in 2007 and $8 million in 2006.

            We have disclosed certain amounts associated with estimated future postretirement benefits other than pensions and characterized such amounts as "other postretirement benefit obligation." Notwithstanding the recording of such amounts and the use of these terms, we do not admit or otherwise acknowledge that such amounts or existing postretirement benefit plans of our company (other than pensions) represent legally enforceable liabilities of us.

    Note 12: Stockholders' Equity

    Capital Stock and Additional Paid-In Capital

            Our certificate of incorporation provides for the following capital stock: common stock, par value $0.01 per share, 3,000,000,000 shares authorized; Class B common stock, par value $0.01 per share, 275,000,000 shares authorized; excess stock, par value $0.01 per share, 800,000,000 shares authorized; and preferred stock, par value $0.01 per share, 9,000,000 shares authorized. As of December 31, 2008 and 2007, there were no shares outstanding of the Class B common stock, excess stock or preferred stock.

    Share Repurchase Program

            During 2006, 2007 and 2008 our Board of Directors approved multiple authorizations for the repurchase of a total of $8.2 billion of our common stock, including a $3 billion authorization in May 2008 that was completed in December 2008. Subsequent to December 31, 2008, our Board of Directors authorized the repurchase of an additional $2 billion of our common stock. The authorizations allow us to repurchase our common stock from time to time through open market purchases and negotiated transactions, or otherwise. The timing, nature and amount of such transactions will depend on a variety of factors, including market conditions, and the program may be suspended, discontinued or accelerated at any time. The sources of funds for the purchases under the remaining authorizations are our existing cash on hand and cash from operations. Purchases are made in the open market, through block trades and other negotiated transactions. Repurchased shares are retired but remain authorized for registration and issuance in the future.

    IV-32

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    THE DIRECTV GROUP, INC.

    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

            The following table sets forth information regarding shares repurchased and retired for the years ended December 31:

     
    		 
    2008
    		 
    2007
    		 
    2006
    		 
     
    		 (Amounts in Millions, Except Per Share Amounts)
    		 

    Total cost of repurchased and retired shares

    		 $3,174 $2,025 $2,977 

    Average price per share

    		  24.12  23.48  16.16 

    Number of shares repurchased and retired

    		  131  86  184 

            For the year ended December 31, 2008, we recorded the $3,174 million in repurchases as a decrease of $1,089 million to "Common stock and additional paid in capital" and an increase of $2,085 million to "Accumulated deficit" in the Consolidated Balance Sheets. For the year ended December 31, 2007, we recorded the $2,025 million in repurchases as a decrease of $692 million to "Common stock and additional paid in capital" and an increase of $1,333 million to "Accumulated deficit" in the Consolidated Balance Sheets. For the year ended December 31, 2006, we recorded the $2,977 million in repurchases as a decrease of $1,452 million to "Common stock and additional paid in capital" and an increase of $1,525 million to "Accumulated deficit" in the Consolidated Balance Sheets.

    Other Comprehensive Income

            The following represents the components of OCI, net of taxes, for the years ended December 31:

     
    		 
    2008
    		 
    2007
    		 
    2006
    		 
     
    		 
    Pre-tax
    Amount
    		 
    Tax
    Benefit
    		 
    Net
    Amount
    		 
    Pre-tax
    Amount
    		 
    Tax
    (Benefit)
    Expense
    		 
    Net
    Amount
    		 
    Pre-tax
    Amount
    		 
    Tax
    (Benefit)
    Expense
    		 
    Net
    Amount
    		 
     
    		 (Dollars in Millions)
    		 

    Amortization of amounts resulting from changes in defined benefit plan experience and actuarial assumptions, net of taxes

    		 $(140)$(53)$(87)$26 $10 $16 $— $— $— 

    Minimum pension liability adjustments

    		  —  —  —  —  —  —  38  14  24 

    Foreign currency translation adjustments

    		  —  —  —  (2) (1) (1) 2  —  2 

    Unrealized holding gains (losses) on securities

    		  (32) (12) (20) 19  7  12  (22) (8) (14)

            We recorded a $46 million charge to "Accumulated other comprehensive loss" in our Consolidated Balance Sheets as of December 31, 2006 for the initial adoption of SFAS No. 158.

    IV-33

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    THE DIRECTV GROUP, INC.

    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

    Accumulated Other Comprehensive Loss

            The following represent the components of "Accumulated other comprehensive loss" in our Consolidated Balance Sheets as of December 31:

     
    		 
    2008
    		 
    2007
    		 
     
    		 (Dollars in Millions)
    		 

    Unamortized net amount resulting from changes in defined benefit plan experience and actuarial assumptions, net of taxes

    		 $(124)$(37)

    Unamortized amount resulting from changes in defined benefit plan provisions, net of taxes

    		  (4) (4)

    Accumulated unrealized gains on securities, net of taxes

    		  1  21 

    Accumulated foreign currency translation adjustments

    		  (1) (1)
          
      

    Total accumulated other comprehensive loss

    		 $(128)$(21)
          

    Note 13: Earnings Per Common Share

            We compute basic earnings per common share, or EPS, by dividing net income by the weighted average number of common shares outstanding for the period.

            Diluted EPS considers the effect of common equivalent shares, which consist entirely of common stock options and unvested restricted stock units issued to employees. In the computation of diluted EPS under the treasury stock method, the amount of assumed proceeds from nonvested stock awards and unexercised stock options includes the amount of compensation cost attributable to future services not yet recognized, proceeds from the exercise of the options, and the incremental income tax benefit or liability as if the awards were distributed during the period. We exclude common equivalent shares from the computation in loss periods as their effect would be antidilutive and we exclude common stock options from the computation of diluted EPS when their exercise price is greater than the average market price of our common stock. The following table sets forth the number of common stock options excluded from the computation of diluted EPS because the options' exercise prices were greater than the average market price of our common stock during the years presented:

     
    		 
    December 31,
    		 
     
    		 
    2008
    		 
    2007
    		 
    2006
    		 
     
    		 (Shares in Millions)
    		 

    Common stock options excluded

    		  27  34  48 

            The following table sets forth comparative information regarding common shares outstanding:

     
    		 
    2008
    		 
    2007
    		 
    2006
    		 
     
    		 (Shares in Millions)
    		 

    Common shares outstanding at January 1

    		  1,148  1,226  1,391 

    Decrease for common shares repurchased and retired

    		  (131) (86) (184)

    Increase for stock options exercised and restricted stock units vested and distributed

    		  7  8  19 
            

    Common shares outstanding at December 31

    		  1,024  1,148  1,226 
            

    Weighted average number of common shares outstanding

    		  1,110  1,195  1,262 
            

    IV-34

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    THE DIRECTV GROUP, INC.

    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

            The reconciliation of the amounts used in the basic and diluted EPS computation was as follows:

     
    		 
    Income
    		 
    Shares
    		 
    Per Share Amounts
    		 
     
    		 (Dollars and Shares in Millions, Except Per Share Amounts)
    		 

    Year Ended December 31, 2008:

    		          

    Basic EPS

    		          
      

    Income from continuing operations

    		 $1,515  1,110 $1.36 

    Effect of Dilutive Securities

    		          
      

    Dilutive effect of stock options and restricted stock units

    		  —  4  — 
            

    Diluted EPS

    		          
      

    Adjusted income from continuing operations

    		 $1,515  1,114 $1.36 
            

    Year Ended December 31, 2007:

    		          

    Basic EPS

    		          
      

    Income from continuing operations

    		 $1,434  1,195 $1.20 

    Effect of Dilutive Securities

    		          
      

    Dilutive effect of stock options and restricted stock units

    		  —  7  — 
            

    Diluted EPS

    		          
      

    Adjusted income from continuing operations

    		 $1,434  1,202 $1.20 
            

    Year Ended December 31, 2006:

    		          

    Basic EPS

    		          
      

    Income from continuing operations

    		 $1,420  1,262 $1.13 

    Effect of Dilutive Securities

    		          
      

    Dilutive effect of stock options and restricted stock units

    		  —  8  (0.01)
            

    Diluted EPS

    		          
      

    Adjusted income from continuing operations

    		 $1,420  1,270 $1.12 
            

    Note 14: Share-Based Payment

            Under The DIRECTV Group, Inc. Amended and Restated 2004 Stock Plan as approved by our stockholders on June 5, 2007, shares, rights or options to acquire up to 21 million shares of common stock plus the number of shares that were granted under a former plan but which, after December 22, 2003 are forfeited, expire or are cancelled without the delivery of shares of common stock or otherwise result in the return of such shares to us, were authorized for grant through June 4, 2017, subject to the approval of the Compensation Committee of our Board of Directors. 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 our stock plans 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 year performance period in comparison with pre-established targets. We determine the fair value of restricted stock units based on the closing stock price of our common shares on the date of grant.

    IV-35

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    THE DIRECTV GROUP, INC.

    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

     
    		 
    Stock Units
    		 
    Weighted-Average
    Grant-Date
    Fair Value
    		 

    Nonvested at January 1, 2008

    		  9,416,496 $17.99 

    Granted

    		  2,692,310  23.19 

    Vested and Distributed

    		  (3,166,095) 17.00 

    Forfeited

    		  (1,245,271) 17.78 
           

    Nonvested at December 31, 2008

    		  7,697,440  20.25 
           

            The weighted average grant-date fair value of restricted stock units granted during the year ended December 31, 2007 was $23.69. The weighted average grant-date fair value of restricted stock units granted during the year ended December 31, 2006 was $13.57.

            The total fair value of restricted stock units vested and distributed was $54 million during the year ended December 31, 2008, $33 million during the year ended December 31, 2007 and $21 million during the year ended December 31, 2006.

      Stock Options

            The Compensation Committee has also granted stock options to acquire our common stock under our stock plans 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 vest over one to five years, expire ten years from date of grant and are subject to earlier termination under certain conditions.

            Changes in the status of outstanding options were as follows:

     
    		 
    Shares
    Under
    Option
    		 
    Weighted-Average
    Exercise Price
    		 
    Weighted-Average
    Remaining
    Contractual Term
    		 
    Aggregate
    Intrinsic
    Value
    		 
     
    		  
    		  
    		  
    		 (in millions)
    		 

    Outstanding at January 1, 2008

    		  48,634,539 $28.69       

    Granted

    		  —  —��      

    Exercised

    		  (5,506,070) 19.09       

    Forfeited or expired

    		  (6,061,725) 33.18       
                 

    Outstanding at December 31, 2008

    		  37,066,744  29.38  2.1 $31 
              

    Exercisable at December 31, 2008

    		  36,260,477 $29.54  2.0 $31 
              

            The total intrinsic value of options exercised was $38 million during the year ended December 31, 2008, $59 million during the year ended December 31, 2007 and $115 million during the year ended December 31, 2006, based on the intrinsic value of individual awards on the date of exercise.

    IV-36

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    THE DIRECTV GROUP, INC.

    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

            The following table presents the estimated weighted average fair value for stock options granted under the Plan using the Black-Scholes valuation model along with the assumptions used in the fair value calculations. Expected stock volatility is based primarily on the historical volatility of our common stock. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The expected option life is based on historical exercise behavior and other factors.

     
    		 
    2007
    		 

    Estimated fair value per option granted

    		 $8.27 

    Average exercise price per option granted

    		  22.43 

    Expected stock volatility

    		  22.5%

    Risk-free interest rate

    		  4.65%

    Expected option life (in years)

    		  7.0 

            There were no stock options granted during the years ended December 31, 2008 and 2006.

            The following table presents amounts recorded related to share-based compensation:

     
    		 
    For the Years Ended December 31,
    		 
     
    		 
    2008
    		 
    2007
    		 
    2006
    		 
     
    		 (Dollars in Millions)
    		 

    Share-based compensation expense recognized

    		 $51 $49 $39 

    Tax benefits associated with share-based compensation expense

    		  19  19  15 

    Actual tax benefits realized for the deduction of share-based compensation expense

    		  43  36  50 

    Proceeds received from stock options exercised

    		  105  118  257 

            As of December 31, 2008, there was $70 million of total unrecognized compensation expense related to unvested restricted stock units and stock options that we expect to recognize as follows: $45 million in 2009 and $25 million in 2010.

    Note 15: Other Income and Expenses

            The following table summarizes the components of "Other, net" in our Consolidated Statements of Operations for the years ended December 31:

     
    		 
    2008
    		 
    2007
    		 
    2006
    		 
     
    		 (Dollars in Millions)
    		 

    Equity in earnings from unconsolidated affiliates

    		 $55 $35 $27 

    Net gain (loss) from sale of investments

    		  1  (6) 14 

    Other

    		  (1) (3) 1 
            
      

    Total other, net

    		 $55 $26 $42 
            

            See Note 6 regarding equity method investments and net gains and losses recorded on the sale of investments.

    IV-37

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    THE DIRECTV GROUP, INC.

    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

    Note 16: Related-Party Transactions

            In the ordinary course of our operations, we enter into transactions with related parties as discussed below.

    Liberty Media, Liberty Global and Discovery Communications

            As a result of the completion of the Liberty Transaction, beginning February 27, 2008, transactions with Liberty Media Corporation, or Liberty Media, and its affiliates, including its equity method investees, may be considered to be related party transactions as Liberty Media currently owns approximately 54% of our outstanding common stock. Our transactions with Liberty Media and its affiliates consist primarily of the purchase of programming.

            In addition, John Malone, Chairman of the Board of Directors of The DIRECTV Group, Inc. and of Liberty Media, has an approximate 23% voting interest in Discovery Communications, Inc., or Discovery Communications, and an approximate 32% voting interest in Liberty Global Inc., or Liberty Global, and serves as Chairman of Liberty Global, and certain of Liberty Media's management and directors also serve as directors of Discovery Communications or Liberty Global. As a result of this common ownership and management, transactions with Discovery Communications and Liberty Global, and their subsidiaries or equity method investees may be considered to be related party transactions. Our transactions with Discovery Communications and Liberty Global consist primarily of purchases of programming created, owned or distributed by Discovery Communications and its subsidiaries and investees.

    News Corporation and affiliates

            News Corporation and its affiliates were considered related parties until February 27, 2008, when News Corporation transferred its 41% interest in our common stock to Liberty Media. Accordingly, the following contractual arrangements with News Corporation and its affiliates are considered related party transactions and reported through February 27, 2008: purchase of programming, products and advertising; license of certain intellectual property, including patents; purchase of system access products, set-top receiver software and support services; sale of advertising space; purchase of employee services; and use of facilities.

            As discussed below in Note 19, during the first quarter of 2008, we received a $160 million cash capital contribution, which we recorded as "Additional paid-in-capital" in the Consolidated Balance Sheets.

            The majority of payments under contractual arrangements with Liberty Media, Discovery Communications, Liberty Global and News Corporation entities relate to multi-year programming contracts. Payments under these contracts are typically subject to annual rate increases and are based on the number of subscribers receiving the related programming.

    Other

            Other related parties include Globo, which provides programming and advertising to Sky Brazil, and companies in which we hold equity method investments, including Sky Mexico.

    IV-38

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    THE DIRECTV GROUP, INC.

    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

            The following table summarizes sales and purchase transactions with related parties:

     
    		 
    2008
    		 
    2007
    		 
    2006
    		 
     
    		 (Dollars in Millions)
    		 

    Sales:

    		          

    Liberty Media and affiliates

    		 $36 $— $— 

    Discovery Communications, Liberty Global and affiliates

    		  10  —  — 

    News Corporation and affiliates

    		  2  24  32 

    Other

    		  9  —  — 
            
      

    Total

    		 $57 $24 $32 
            

    Purchases:

    		          

    Liberty Media and affiliates

    		 $269 $— $— 

    Discovery Communications, Liberty Global and affiliates

    		  186  —  — 

    News Corporation and affiliates

    		  167  901  783 

    Other

    		  384  223  49 
            
      

    Total

    		 $1,006 $1,124 $832 
            

            The following table sets forth the amount of accounts receivable from and accounts payable to related parties as of December 31:

     
    		 
    2008
    		 
    2007
    		 
     
    		 (Dollars in Millions)
    		 

    Accounts receivable

    		 $29 $22 

    Accounts payable

    		  165  285 

            The accounts receivable and accounts payable balances as of December 31, 2008 are primarily related to affiliates of Liberty Media and the accounts receivable and accounts payable balances as of December 31, 2007 are primarily related to affiliates of News Corporation.

            In addition to the transactions described above, in connection with our purchase of News Corporation's interests as part of the Sky Transactions, we made cash payments to News Corporation of $315 million in 2006. We received $127 million in cash from News Corporation in August 2006 for the repayment of a note receivable for the assumption of certain liabilities as part of the Sky Transactions described in Note 17.

    Note 17: Acquisitions

    Acquisitions

      Home Services Providers

            180 Connect.    On July 8, 2008, we acquired 100% of 180 Connect Inc.'s outstanding common stock and exchangeable shares. Simultaneously, in a separate transaction, UniTek USA, LLC acquired 100% of 180 Connect's cable service operating unit and operations in certain of our installation services markets in exchange for satellite installation operations in certain markets and $7 million in cash. These transactions provide us with control over a significant portion of DIRECTV U.S.' home service provider network. We paid $91 million in cash, net of the $7 million we received from UniTek USA, for the acquisition, including the equity purchase price, repayment of assumed debt and related transaction costs.

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    THE DIRECTV GROUP, INC.

    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

            We accounted for the 180 Connect acquisition using the purchase method of accounting, and began consolidating the results from the date of acquisition. The December 31, 2008 consolidated financial statements reflect the preliminary allocation of the $91 million net purchase price to assets acquired and the liabilities assumed based on their estimated fair values at the date of acquisition using information currently available. The assets acquired included approximately $5 million in cash. Amounts allocated to tangible assets, deferred tax assets and liabilities, and accrued liabilities are estimates pending the completion of analyses currently in process. The excess of the purchase price over the estimated fair values of the net assets acquired has been recorded as goodwill, resulting in an increase in goodwill of $142 million during 2008. We are currently evaluating whether the recorded goodwill will be deductible for tax purposes. The purchase price allocation is expected to be completed during the first half of 2009.

            The following table sets forth the preliminary allocation of the purchase price to the 180 Connect net assets acquired on July 8, 2008 (dollars in millions):

    Total current assets

    		 $21 

    Property and equipment

    		  16 

    Goodwill

    		  142 
        

    Total assets acquired

    		 $179 
        

    Total current liabilities

    		 $80 

    Other liabilities

    		  8 
        

    Total liabilities assumed

    		 $88 
        
      

    Net assets acquired

    		 $91 
        

            The following selected unaudited pro forma information is being provided to present a summary of the combined results of The DIRECTV Group and 180 Connect for 2008 and 2007 as if the acquisition had occurred as of the beginning of the respective periods, giving effect to purchase accounting adjustments. The pro forma data is presented for informational purposes only and may not necessarily reflect the results of our operations had 180 Connect operated as part of us for each of the periods presented, nor are they necessarily indicative of the results of future operations. The pro forma information excludes the effect of non-recurring charges.

     
    		 
    Years Ended December 31,
    		 
     
    		 
    2008
    		 
    2007
    		 
     
    		 (Dollars in Millions, Except Per Share Amounts)
    		 

    Revenues

    		 $19,693 $17,246 

    Net income

    		  1,479  1,416 

    Basic and diluted earnings per common share

    		  1.33  1.18 

            Other.    In August 2008, we paid $11 million in cash to purchase certain assets and we assumed certain liabilities of another home service provider for DIRECTV U.S. We accounted for the acquisition using the purchase method of accounting, and began consolidating the results from the date of acquisition. Amounts allocated to tangible assets, deferred tax assets and liabilities, and accrued liabilities are estimates pending the completion of analyses currently in process. The excess of the purchase price over the estimated fair values of the net assets acquired has been recorded as goodwill,

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    THE DIRECTV GROUP, INC.

    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)


    resulting in an increase in goodwill of $15 million during 2008. We expect the recorded goodwill to be deductible for tax purposes.

      Darlene Transaction

            On January 30, 2007, we acquired Darlene's 14% equity interest in DLA LLC for $325 million in cash. We accounted for the acquisition of this interest using the purchase method of accounting.

            The following table set forth the final allocation of the excess purchase price over the book value of the minority interest acquired:

    Goodwill

    		 $187 

    Intangible assets

    		  75 
        

    Total assets acquired

    		  262 
        
      

    Net assets acquired

    		 $262 
        

            Intangible assets that are included in "Intangible assets, net" in our Consolidated Balance Sheets include a subscriber related intangible asset to be amortized over six years and a trade name intangible asset to be amortized over 20 years from the Darlene Transaction.

      Sky Transactions

            During 2006 we completed the last in a series of transactions with News Corporation, Grupo Televisa, S.A., or Televisa, Globo and Liberty Media International, which we refer to as the Sky Transactions as further described below. The Sky Transactions resulted in the combination of the DTH satellite platforms of DIRECTV and SKY in Latin America into a single platform in each of the major territories in the region.

            Brazil.    On August 23, 2006, we completed the merger of our Brazil business, Galaxy Brasil Ltda., or GLB, with and into Sky Brazil, and completed the purchase of News Corporation's and Liberty Media International's interests in Sky Brazil. As a result of these transactions, we hold a 74% interest in the combined business. The purchase consideration for the transactions amounted to $670 million, including $396 million in cash paid, of which we paid $362 million to News Corporation and Liberty Media International in 2004 and $30 million to News Corporation in August 2006, the $64 million fair value of the reduction of our interest in GLB resulting from the merger and the assumption of Sky Brazil's $210 million bank loan.

            We accounted for the Sky Brazil acquisition using the purchase method of accounting, and began consolidating the results of Sky Brazil from the date of acquisition. We also accounted for the reduction of our interest in GLB resulting from the merger as a partial sale pursuant to EITF No. 90-13 "Accounting for Simultaneous Common Control Mergers," which resulted in us recording a one-time pre-tax gain during the third quarter of 2006 of $61 million in "Gain from disposition of businesses" in the Consolidated Statements of Operations.

            The following selected unaudited pro forma information is being provided to present a summary of the combined results of The DIRECTV Group and Sky Brazil for the year ended December 31, 2006 as if the acquisition had occurred as of the beginning of 2006, giving effect to purchase accounting adjustments. The pro forma data is presented for informational purposes only and may not necessarily reflect our results of operations had Sky Brazil operated as part of us for the period presented, nor are

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    THE DIRECTV GROUP, INC.

    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)


    they necessarily indicative of the results of future operations. The pro forma information excludes the effect of non-recurring charges.

     
    		 
    Years Ended
    December 31, 2006
    		 
     
    		 (Dollars in Millions, Except
    Per Share Amounts)
    		 

    Revenues

    		 $15,077 

    Operating profit

    		  2,375 

    Income from continuing operations before income taxes and minority interests

    		  2,307 

    Net income

    		  1,425 

    Basic earnings per common share

    		  1.13 

    Diluted earnings per common share

    		  1.12 

            Mexico.    In Mexico, also as part of the Sky Transactions, DTVLA's local operating company, DIRECTV Mexico, sold its subscriber list to Sky Mexico and, after completing the transfer of its subscribers to Sky Mexico, ceased providing services in 2005. In 2006, upon completion of the transaction, we recorded a gain of $57 million in "Gain from disposition of businesses" in our Consolidated Statements of Operations when DLA LLC received an equity interest in Sky Mexico resulting from the sale of DIRECTV Mexico's subscriber list and transfer of subscribers to Sky Mexico. Also in February 2006, we acquired News Corporation's and Liberty Media International's equity interests in Sky Mexico for $373 million in cash. On April 27, 2006, we sold a portion of our equity interest to Televisa for $59 million in cash, which reduced our equity interest in Sky Mexico to 41%. We account for our investment in Sky Mexico using the equity method of accounting. See Note 6 for additional information regarding this investment.

            Other.    In 2004, we acquired Sky Multi-Country Partners and related entities for $30 million in cash. As part of this transaction, News Corporation agreed to reimburse us $127 million for the Sky entities' net liabilities we assumed, which we received from News Corporation in August 2006.

    Note 18: Segment Reporting

            Our two reportable segments, DIRECTV U.S. and DIRECTV Latin America, acquire, promote, sell and distribute digital entertainment programming via satellite to residential and commercial subscribers. Corporate and Other includes the corporate office, eliminations and other entities.

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    THE DIRECTV GROUP, INC.

    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

            Selected information for our operating segments is reported as follows:

     
    		 
    DIRECTV
    U. S.
    		 
    DIRECTV
    Latin
    America
    		 
    Corporate and Other
    		 
    Total
    		 
     
    		 (Dollars in millions)
    		 

    2008

    		             

    Revenues

    		 $17,310 $2,383 $— $19,693 
              

    Operating profit (loss)

    		 $2,330 $426 $(61)$2,695 

    Add: Depreciation and amortization expense

    		  2,061  264  (5) 2,320 
              

    Operating profit (loss) before depreciation and amortization (1)

    		 $4,391 $690 $(66)$5,015 
              

    Segment assets

    		 $12,546 $3,301 $692 $16,539 

    Capital expenditures

    		  1,765  447  17  2,229 

    2007

    		             

    Revenues

    		 $15,527 $1,719 $— $17,246 
              

    Operating profit (loss)

    		 $2,402 $159 $(75)$2,486 

    Add: Depreciation and amortization expense

    		  1,448  235  1  1,684 
              

    Operating profit (loss) before depreciation and amortization (1)

    		 $3,850 $394 $(74)$4,170 
              

    Segment assets

    		 $12,297 $2,456 $310 $15,063 

    Capital expenditures

    		  2,326  336  30  2,692 

    2006

    		             

    Revenues

    		 $13,744 $1,013 $(2)$14,755 
              

    Operating profit (loss)

    		 $2,348 $79 $(70)$2,357 

    Add: Depreciation and amortization expense

    		  873  165  (4) 1,034 
              

    Operating profit (loss) before depreciation and amortization (1)

    		 $3,221 $244 $(74)$3,391 
              

    Segment assets

    		 $11,687 $2,001 $1,453 $15,141 

    Capital expenditures

    		  1,798  178  —  1,976 
    (1)
    Operating profit (loss) before depreciation and amortization, which is a financial measure that is not determined in accordance with GAAP can be calculated by adding amounts under the caption "Depreciation and amortization expense" to "Operating profit (loss)." This measure should be used in conjunction with GAAP financial measures and is not presented as an alternative measure of operating results, as determined in accordance with GAAP. Our management and Board of Directors use operating profit (loss) before depreciation and amortization to evaluate the operating performance of our company and our business segments and to allocate resources and capital to business segments. This metric is also used as a measure of performance for incentive compensation purposes and to measure income generated from operations that could be used to fund capital expenditures, service debt or pay taxes. Depreciation and amortization expense primarily represents an allocation to current expense of the cost of historical capital expenditures and for intangible assets resulting from prior business acquisitions. To compensate for the exclusion of depreciation and amortization expense from operating profit, our management and Board of Directors separately measure and budget for capital expenditures and business acquisitions.

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    THE DIRECTV GROUP, INC.

    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

      We believe this measure is useful to investors, along with GAAP measures (such as revenues, operating profit and net income), to compare our operating performance to other communications, entertainment and media service providers. We believe that investors use current and projected operating profit (loss) before depreciation and amortization and similar measures to estimate our current or prospective enterprise value and make investment decisions. This metric provides investors with a means to compare operating results exclusive of depreciation and amortization. Our management believes this is useful given the significant variation in depreciation and amortization expense that can result from the timing of capital expenditures, the capitalization of intangible assets, potential variations in expected useful lives when compared to other companies and periodic changes to estimated useful lives.

            The following represents a reconciliation of operating profit before depreciation and amortization to reported net income on the Consolidated Statements of Operations:

     
    		 
    Years Ended December 31,
    		 
     
    		 
    2008
    		 
    2007
    		 
    2006
    		 
     
    		 (Dollars in Millions)
    		 

    Operating profit before depreciation and amortization

    		 $5,015 $4,170 $3,391 

    Depreciation and amortization expense

    		  (2,320) (1,684) (1,034)
            

    Operating profit

    		  2,695  2,486  2,357 

    Interest income

    		  81  111  146 

    Interest expense

    		  (360) (235) (246)

    Other, net

    		  55  26  42 
            

    Income from continuing operations before income taxes and minority interests

    		  2,471  2,388  2,299 

    Income tax expense

    		  (864) (943) (866)

    Minority interests in net earnings of subsidiaries

    		  (92) (11) (13)
            

    Income from continuing operations

    		  1,515  1,434  1,420 

    Income from discontinued operations, net of taxes

    		  6  17  — 
            

    Net income

    		 $1,521 $1,451 $1,420 
            

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    THE DIRECTV GROUP, INC.

    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

            The following table presents revenues earned from subscribers located in different geographic areas. Property is grouped by its physical location.

     
    		 
    Years Ended and As of December 31,
    		 
     
    		 
    2008
    		 
    2007
    		 
    2006
    		 
     
    		 
    Revenues
    		 
    Net Property
    & Satellites
    		 
    Revenues
    		 
    Net Property
    & Satellites
    		 
    Revenues
    		 
    Net Property
    & Satellites
    		 
     
    		 (Dollars in Millions)
    		 

    North America

    		                   
     

    United States

    		 $17,454 $5,728 $15,687 $5,330 $13,907 $4,088 
                  

    South America and the Caribbean

    		                   
     

    Brazil

    		  1,290  566  944  251  417  159 
     

    Venezuela

    		  428  136  258  99  171  73 
     

    Argentina

    		  325  131  211  85  152  78 
     

    Other

    		  196  86  146  68  108  55 
                  
      

    Total South America and the Caribbean

    		  2,239  919  1,559  503  848  365 
                  
     

    Total

    		 $19,693 $6,647 $17,246 $5,833 $14,755 $4,453 
                  

    Note 19: Commitments and Contingencies

    Commitments

            At December 31, 2008, minimum future commitments under noncancelable operating leases having lease terms in excess of one year were primarily for satellite transponder leases and real property and aggregated $291 million, payable as follows: $51 million in 2009, $50 million in 2010, $47 million in 2011, $35 million in 2012, $36 million in 2013 and $72 million thereafter. Certain of these leases contain escalation clauses and renewal or purchase options, which we have not considered in the amounts disclosed. Rental expenses under operating leases were $95 million in 2008, $114 million in 2007 and $110 million in 2006.

            At December 31, 2008, our minimum payments under agreements to purchase broadcast programming, and the purchase of services that we have outsourced to third parties, such as billing services, and satellite telemetry, tracking and control, satellite construction and launch contracts and broadcast center services aggregated $3,601 million, payable as follows: $1,308 million in 2009, $1,178 million in 2010, $756 million in 2011, $228 million in 2012, $108 million in 2013 and $23 million thereafter.

            As of December 31, 2008, other long-term obligations totaling $210 million are payable approximately as follows: $80 million in 2009, $83 million in 2010 and $47 million in 2011. These amounts are recorded in "Accounts payable and accrued liabilities" and "Other liabilities and deferred credits" in the Consolidated Balance Sheets.

    Contingencies

      Puerto Rico Condition

            In connection with approval by the Federal Communications Commission, or FCC, of the Liberty Transaction, the FCC imposed certain conditions related to attributable interests in two pay television

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    THE DIRECTV GROUP, INC.

    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

    operations: DIRECTV Puerto Rico and Liberty Cablevision of Puerto Rico Ltd. We refer to the FCC's requirements as the "Puerto Rico Condition". Because neither News Corporation nor Liberty Media could satisfy the Puerto Rico Condition, in connection with the close of the transaction a Special Committee of independent directors of our Board of Directors approved an agreement with News Corporation and Liberty Media in which we assumed responsibility for the satisfaction, modification or waiver of the Puerto Rico Condition within the one year period specified by the FCC. As part of this agreement, during the first quarter of 2008, we received a $160 million cash capital contribution, which we recorded as "Additional paid-in-capital" in the Consolidated Balance Sheets.

            In order to comply with terms of the FCC order, effective February 25, 2009, we placed the shares of DIRECTV Puerto Rico into a trust and appointed an independent trustee who will oversee the management and operation of DIRECTV Puerto Rico, and will have the authority, subject to certain conditions, to divest ownership of DIRECTV Puerto Rico. We will continue to consolidate the results of DIRECTV Puerto Rico following this transaction.

      Redeemable Minority Interest

            In connection with our acquisition of Sky Brazil in 2006, our partner who holds the remaining 25.9% interest, Globo was granted the right, until January 2014, to require us to purchase all or a portion (but not less than half) of its shares in Sky Brazil. Upon exercising this right, the fair value of Sky Brazil shares will be determined, by mutual agreement or by an outside valuation expert, and we have the option to elect to pay for the Sky Brazil shares in cash, shares of our common stock or a combination of both. As of December 31, 2008, we estimate that Globo's 25.9% equity interest in Sky Brazil has a fair value of approximately $325 million to $450 million. We determined the range of fair values using significant unobservable inputs, which are Level 3 inputs under SFAS No. 157.

      Litigation

            Litigation is subject to uncertainties and the outcome of individual litigated matters is not predictable with assurance. Various legal actions, claims and proceedings are pending against us arising in the ordinary course of business. We have established loss provisions for matters in which losses are probable and can be reasonably estimated. Some of the matters may involve compensatory, punitive, or treble damage claims, or demands that, if granted, could require us to pay damages or make other expenditures in amounts that could not be estimated at December 31, 2008. After discussion with counsel representing us in those actions, it is the opinion of management that such litigation is not expected to have a material adverse effect on our consolidated financial statements.

            Finisar Corporation.    As previously reported, we were successful in 2008 getting the jury verdict in the Finisar case vacated on appeal. The original verdict found the patent to be valid and willfully infringed, and the jury awarded approximately $79 million in damages. The trial court increased the damages award by $25 million because of the jury finding of willful infringement and awarded pre-judgment interest of $13 million. DIRECTV was also ordered to pay into escrow $1.60 per new set-top receiver manufactured for use with the DIRECTV system beginning June 17, 2006 and continuing until the patent expires in 2012 or was otherwise found to be invalid. On April 18, 2008, the Court of Appeals reversed the verdict of the district court in part, vacated the findings of infringement, and remanded for further proceedings on the remaining issues finding that the district court had applied erroneous interpretations of certain terms of the claims. The Court found a principal independent claim to be anticipated and therefore invalid, and remanded for further proceedings regarding validity of other asserted claims in view of this finding. The Court reversed the verdict of

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    THE DIRECTV GROUP, INC.

    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)


    willful infringement, and affirmed the earlier ruling finding several claims to be invalid prior to trial. Following these decisions, our appeal bond was terminated and the escrowed royalties were returned to us. In the remand now pending, initial summary judgment motions on invalidity of additional claims have been submitted. If necessary, there will be further proceedings and a trial of remaining issues, which is presently scheduled for October 2009.

      Income Tax Matters

            In 2008, we recorded a $48 million reduction to our unrecognized tax benefits as a result of the expiration of the statute of limitations in foreign and federal taxing jurisdictions, of which $27 million related to a previously divested business, which we included in "Income from discontinued operations, net of taxes" in the Consolidated Statements of Operations.

            In the second quarter of 2007, we recorded a $17 million reduction to our unrecognized tax benefits as a result of the settlement of a foreign withholding tax dispute from a previously divested business, which we included in "Income from discontinued operations, net of taxes" in the Consolidated Statements of Operations.

            We have received tax assessments from certain foreign jurisdictions and have agreed to indemnify previously divested businesses for certain tax assessments relating to periods prior to their respective divestitures. These assessments are in various stages of the administrative process or litigation, and we believe we have adequately provided for any related liability.

            While the outcome of these assessments and other tax issues cannot be predicted with certainty, we believe that the ultimate outcome will not have a material effect on our consolidated financial statements.

      Satellites

            We may purchase in-orbit and launch insurance to mitigate the potential financial impact of satellite launch and in-orbit failures if the premium costs are considered economic relative to the risk of satellite failure. The insurance generally covers the unamortized book value of covered satellites. We do not insure against lost revenues in the event of a total or partial loss of the capacity of a satellite. We generally rely on in-orbit spare satellites and excess transponder capacity at key orbital slots to mitigate the impact a satellite failure could have on our ability to provide service. At December 31, 2008, the net book value of in-orbit satellites was $2,184 million, of which $1,978 million was uninsured.

      Other

            In July 2008, we amended our agreement with Thomson such that the amount of the rebate we can earn from the purchase of set-top receivers was reduced from $57 million to $42 million and in return, we are no longer required to purchase $4 billion in set-top receivers over the contract term. We continue to be obligated to grant Thomson a portion of all set-top receiver purchases. As of December 31, 2008, included in "Accounts receivable, net" and "Investments and other assets" in the Consolidated Balance Sheets is a receivable for $21 million related to this agreement.

            We are contingently liable under standby letters of credit and bonds in the aggregate amount of $33 million at December 31, 2008.

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    THE DIRECTV GROUP, INC.

    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Concluded)

    Note 20: Selected Quarterly Data (Unaudited)

            The following table presents unaudited selected quarterly data for 2008 and 2007:

     
    		 
    1st
    		 
    2nd
    		 
    3rd
    		 
    4th
    		 
     
    		 (Dollars in Millions, Except Per Share Amounts)
    		 

    2008 Quarters

    		             

    Revenues

    		 $4,591 $4,807 $4,981 $5,314 

    Operating profit

    		  657  801  658  579 

    Income from continuing operations

    		  371  455  363  326 

    Income from discontinued operations, net of taxes

    		  —  —  —  6 

    Net income

    		  371 $455  363  332 

    Basic and diluted earnings per common share from continuing operations

    		  0.32  0.40  0.33  0.31 

    2007 Quarters

    		             

    Revenues

    		 $3,908 $4,135 $4,327 $4,876 

    Operating profit

    		  563  740  566  617 

    Income from continuing operations

    		  336  431  319  348 

    Income from discontinued operations, net of taxes

    		  —  17  —  — 

    Net income

    		  336  448  319  348 

    Basic and diluted earnings per common share from continuing operations

    		  0.27  0.36  0.27  0.30 

    ***

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    Report of Independent Registered Public Accounting Firm

    The Board of Directors and Stockholders
    Expedia, Inc.

            We have audited the accompanying consolidated balance sheets of Expedia, Inc. as of December 31, 2008 and 2007, and the related consolidated statements of operations, consolidated statements of changes in stockholders' equity and comprehensive income (loss), and consolidated statements of cash flows for each of the three years in the period ended December 31, 2008. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

            We conducted our audits in accordance with 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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of Expedia, Inc. at December 31, 2008 and 2007, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2008, in conformity with U.S. generally accepted accounting principles.

            As discussed in Note 2 to the consolidated financial statements, the Company adopted Financial Accounting Standards Board ("FASB") Interpretation No. 48,Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109, effective January 1, 2007.

            We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Expedia, Inc.'s internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 18, 2009 expressed an unqualified opinion thereon.

                          Ernst & Young LLP

    Seattle, Washington
    February 18, 2009

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    EXPEDIA, INC.

    CONSOLIDATED STATEMENTS OF OPERATIONS

     
    		 Year Ended December 31, 
     
    		 2008 2007 2006 
     
    		 (In thousands, except per share data)
    		 

    Revenue

    		 $2,937,013 $2,665,332 $2,237,586 

    Cost of revenue(1)

    		  634,744  562,401  502,638 
            

    Gross profit

    		  2,302,269  2,102,931  1,734,948 

    Operating expenses:

    		          
     

    Selling and marketing(1)

    		  1,101,403  992,560  786,195 
     

    General and administrative(1)

    		  355,431  321,250  289,649 
     

    Technology and content(1)

    		  208,952  182,483  140,371 
     

    Amortization of intangible assets

    		  69,436  77,569  110,766 
     

    Impairment of goodwill

    		  2,762,100  —  — 
     

    Impairment of intangible and other long-lived assets

    		  233,900  —  47,000 
     

    Amortization of non-cash distribution and marketing

    		  —  —  9,638 
            

    Operating income (loss)

    		  (2,428,953) 529,069  351,329 

    Other income (expense):

    		          
     

    Interest income

    		  30,411  39,418  32,065 
     

    Interest expense

    		  (71,984) (52,896) (17,266)
     

    Other, net

    		  (44,178) (18,607) 18,770 
            

    Total other income (expense), net

    		  (85,751) (32,085) 33,569 
            

    Income (loss) before income taxes and minority interest

    		  (2,514,704) 496,984  384,898 

    Provision for income taxes

    		  (5,966) (203,114) (139,451)

    Minority interest in (income) loss of consolidated subsidiaries, net

    		  2,907  1,994  (513)
            

    Net income (loss)

    		 $(2,517,763)$295,864 $244,934 
            

    Net income (loss) per share available to common stockholders:

    		          
     

    Basic

    		 $(8.80)$1.00 $0.72 
     

    Diluted

    		  (8.63) 0.94  0.70 

    Shares used in computing income (loss) per share:

    		          
     

    Basic

    		  286,167  296,640  338,047 
     

    Diluted

    		  291,830  314,233  352,181 


    		          

    (1) Includes stock-based compensation as follows:

    		          
     

    Cost of revenue

    		 $2,253 $2,893 $8,399 
     

    Selling and marketing

    		  10,324  12,472  15,893 
     

    General and administrative

    		  34,335  31,851  36,877 
     

    Technology and content

    		  14,379  15,633  19,116 
            
      

    Total stock-based compensation

    		 $61,291 $62,849 $80,285 
            

    See notes to consolidated financial statements.

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    EXPEDIA, INC.

    CONSOLIDATED BALANCE SHEETS

     
    		 December 31, 
     
    		 2008 2007 
     
    		 (In thousands, except per share data)
    		 

    ASSETS

    		       

    Current assets:

    		       
     

    Cash and cash equivalents

    		 $665,412 $617,386 
     

    Restricted cash and cash equivalents

    		  3,356  16,655 
     

    Short-term investments

    		  92,762  — 
     

    Accounts receivable, net of allowance of $12,584 and $6,081

    		  267,270  268,008 
     

    Prepaid merchant bookings

    		  66,081  66,778 
     

    Prepaid expenses and other current assets

    		  103,833  76,828 
          

    Total current assets

    		  1,198,714  1,045,655 

    Property and equipment, net

    		  247,954  179,490 

    Long-term investments and other assets

    		  75,593  93,182 

    Intangible assets, net

    		  833,419  970,757 

    Goodwill

    		  3,538,569  6,006,338 
          

    TOTAL ASSETS

    		 $5,894,249 $8,295,422 
          

    LIABILITIES AND STOCKHOLDERS' EQUITY

    		       

    Current liabilities:

    		       
     

    Accounts payable, merchant

    		 $625,059 $704,044 
     

    Accounts payable, other

    		  150,534  148,233 
     

    Deferred merchant bookings

    		  523,563  609,117 
     

    Deferred revenue

    		  15,774  11,957 
     

    Accrued expenses and other current liabilities

    		  251,238  301,001 
          

    Total current liabilities

    		  1,566,168  1,774,352 

    Long-term debt

    		  894,548  500,000 

    Credit facility

    		  650,000  585,000 

    Deferred income taxes, net

    		  189,541  351,168 

    Other long-term liabilities

    		  212,661  204,886 

    Minority interest

    		  52,937  61,935 

    Commitments and contingencies

    		       

    Stockholders' equity:

    		       
     

    Preferred stock $.001 par value

    		  —  — 
      

    Authorized shares: 100,000

    		       
      

    Series A shares issued and outstanding: 1 and 1

    		       
     

    Common stock $.001 par value

    		  340  337 
      

    Authorized shares: 1,600,000

    		       
      

    Shares issued: 339,525 and 337,057

    		       
      

    Shares outstanding: 261,374 and 259,489

    		       
     

    Class B common stock $.001 par value

    		  26  26 
      

    Authorized shares: 400,000

    		       
      

    Shares issued and outstanding: 25,600 and 25,600

    		       
     

    Additional paid-in capital

    		  5,979,484  5,902,582 
     

    Treasury stock—Common stock, at cost

    		  (1,731,235) (1,718,833)
      

    Shares: 78,151 and 77,568

    		       
     

    Retained earnings (deficit)

    		  (1,915,559) 602,204 
     

    Accumulated other comprehensive income (loss)

    		  (4,662) 31,765 
          

    Total stockholders' equity

    		  2,328,394  4,818,081 
          

    TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

    		 $5,894,249 $8,295,422 
          

    See notes to consolidated financial statements.

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    EXPEDIA, INC.

    CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)

     
    		  
    		  
    		 Class B
    Common Stock    		  
    		  
    		  
    		  
    		  
    		  
    		 
     
    		 Common Stock  
    		 Treasury Stock  
    		 Accumulated
    Other
    Comprehensive
    Income (Loss)    		  
    		 
     
    		 Additional
    Paid-in
    Capital    		 Retained
    Earnings
    (Deficit)    		  
    		 
     
    		 Shares Amount Shares Amount Shares Amount Total 
     
    		 (In thousands, except share data)
    		 

    Balance as of December 31, 2005

    		  323,184,577 $323  25,599,998 $26 $5,695,498  1,205,091 $(25,464)$64,978 $(1,598)$5,733,763 

    Comprehensive income:

    		                               
     

    Net income

    		                       244,934     244,934 
     

    Net loss on derivative contracts

    		                          (1,119) (1,119)
     

    Currency translation adjustment

    		                          14,696  14,696 
                                   

    Total comprehensive income

    		                             258,511 
                                   

    Settlement of derivative liability

    		              80,832              80,832 

    Proceeds from exercise of equity instruments

    		  4,881,699  5        34,283              34,288 

    Spin-Off related tax adjustments

    		              19,139              19,139 

    Tax deficiencies on equity awards

    		              (10,296)             (10,296)

    Capital contribution from sale of business

    		              2,524              2,524 

    Treasury stock activity related to vesting of equity instruments

    		                 960,137  (7,292)       (7,292)

    Common stock repurchases

    		                 20,000,000  (288,399)       (288,399)

    Modification of cash-based equity awards

    		              2,930              2,930 

    Stock-based compensation expense

    		              78,290              78,290 
                          

    Balance as of December 31, 2006

    		  328,066,276  328  25,599,998  26  5,903,200  22,165,228  (321,155) 309,912  11,979  5,904,290 

    Comprehensive income:

    		                               
     

    Net income

    		                       295,864     295,864 
     

    Net gain on derivative contracts

    		                          3,018  3,018 
     

    Currency translation adjustment

    		                          16,768  16,768 
                                   

    Total comprehensive income

    		                             315,650 
                                   

    Cumulative effect of adoption of FIN 48

    		                       (3,572)    (3,572)

    Settlement of derivative liability

    		              6,579              6,579 

    Proceeds from exercise of equity instruments

    		  8,990,484  9        54,843              54,852 

    Withholding taxes for stock option exercises

    		              (121,208)             (121,208)

    Tax deficiencies on equity awards

    		              (459)             (459)

    Treasury stock activity related to vesting of equity instruments

    		                 402,427  (9,389)       (9,389)

    Common stock repurchases

    		                 55,000,003  (1,388,289)       (1,388,289)

    Stock-based compensation expense

    		              60,333              60,333 

    Other

    		              (706)             (706)
                          

    Balance as of December 31, 2007

    		  337,056,760  337  25,599,998  26  5,902,582  77,567,658  (1,718,833) 602,204  31,765  4,818,081 

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    EXPEDIA, INC.

    CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS) (Continued)

     
    		  
    		  
    		 Class B
    Common Stock    		  
    		  
    		  
    		  
    		  
    		  
    		 
     
    		 Common Stock  
    		 Treasury Stock  
    		 Accumulated
    Other
    Comprehensive
    Income (Loss)    		  
    		 
     
    		 Additional
    Paid-in
    Capital    		 Retained
    Earnings
    (Deficit)    		  
    		 
     
    		 Shares Amount Shares Amount Shares Amount Total 
     
    		 (In thousands, except share data)
    		 

    Balance as of December 31, 2007

    		  337,056,760  337  25,599,998  26  5,902,582  77,567,658  (1,718,833) 602,204  31,765  4,818,081 

    Comprehensive loss:

    		                               
     

    Net loss

    		                       (2,517,763)    (2,517,763)
     

    Net loss on derivative contracts

    		                          (339) (339)
     

    Currency translation adjustment

    		                          (36,088) (36,088)
                                   

    Total comprehensive loss

    		                             (2,554,190)
                                   

    Settlement of derivative liability

    		              10,500              10,500 

    Capital contribution from sale of business

    		              1,624              1,624 

    Proceeds from exercise of equity instruments

    		  2,468,708  3        6,330              6,333 

    Tax deficiencies on equity awards

    		             ��(1,646)             (1,646)

    Treasury stock activity related to vesting of equity instruments

    		                 583,515  (12,402)       (12,402)

    Stock-based compensation expense

    		              60,094              60,094 
                          

    Balance as of December 31, 2008

    		  339,525,468 $340  25,599,998 $26 $5,979,484  78,151,173 $(1,731,235)$(1,915,559)$(4,662)$2,328,394 
                          

    We had 751 shares of preferred stock outstanding as of December 31, 2008 and 2007.

    See notes to consolidated financial statements.

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    EXPEDIA, INC.

    CONSOLIDATED STATEMENTS OF CASH FLOWS

     
    		 Year Ended December 31, 
     
    		 2008 2007 2006 
     
    		 (In thousands)
    		 

    Operating activities:

    		          

    Net income (loss)

    		 $(2,517,763)$295,864 $244,934 

    Adjustments to reconcile net income (loss) to net cash provided by operating activities:

    		          
     

    Depreciation of property and equipment, including internal-use software and website development

    		  76,800  59,526  48,779 
     

    Amortization of intangible assets, non-cash distribution and marketing and stock-based compensation

    		  130,727  140,418  200,689 
     

    Deferred income taxes

    		  (209,042) (1,583) (10,652)
     

    (Gain) loss on derivative instruments assumed at Spin-Off

    		  (4,600) 5,748  (8,137)
     

    Equity in (income) loss of unconsolidated affiliates

    		  979  2,614  (2,541)
     

    Minority interest in income (loss) of consolidated subsidiaries, net

    		  (2,907) (1,994) 513 
     

    Impairment of goodwill

    		  2,762,100  —  — 
     

    Impairment of intangible and other long-lived assets

    		  233,900  —  47,000 
     

    Foreign exchange (gain) loss on cash and cash equivalents, net

    		  77,958  (12,524) (37,182)
     

    Realized loss on foreign currency forwards

    		  55,175  —  — 
     

    Other

    		  2,967  3,801  1,100 
     

    Changes in operating assets and liabilities, net of effects from acquisitions:

    		          
      

    Accounts receivable

    		  32,208  (44,363) (32,148)
      

    Prepaid merchant bookings and prepaid expenses

    		  (15,072) (32,378) (20,694)
      

    Accounts payable, merchant

    		  (75,443) 101,068  63,246 
      

    Accounts payable, other, accrued expenses and other current liabilities

    		  54,400  51,702  59,858 
      

    Deferred merchant bookings

    		  (85,443) 142,608  59,450 
      

    Deferred revenue

    		  3,744  1,562  3,225 
            

    Net cash provided by operating activities

    		  520,688  712,069  617,440 
            

    Investing activities:

    		          
     

    Capital expenditures, including internal-use software and website development

    		  (159,827) (86,658) (92,631)
     

    Acquisitions, net of cash acquired

    		  (538,439) (59,622) (32,518)
     

    Reclassification of Reserve Primary Fund holdings

    		  (80,360) —  — 
     

    Distribution from Reserve Primary Fund

    		  64,387  —  — 
     

    Net settlement of foreign currency forwards

    		  (55,175) —  — 
     

    Purchase of short-term investments

    		  (92,923) —  — 
     

    Changes in long-term investments and deposits

    		  1,155  (33,226) (1,514)
     

    Proceeds from sale of business to a related party

    		  1,624  —  13,163 
            

    Net cash used in investing activities

    		  (859,558) (179,506) (113,500)
            

    Financing activities:

    		          
     

    Credit facility borrowings

    		  740,000  755,000  — 
     

    Credit facility repayments

    		  (675,000) (170,000) (230,000)
     

    Proceeds from issuance of long-term debt, net of issuance costs

    		  392,348  —  495,346 
     

    Changes in restricted cash and cash equivalents

    		  11,753  (6,494) 4,578 
     

    Proceeds from exercise of equity awards

    		  6,353  55,038  35,258 
     

    Excess tax benefit on equity awards

    		  3,191  95,702  1,317 
     

    Withholding taxes for stock option exercises

    		  —  (121,208) — 
     

    Treasury stock activity

    		  (12,865) (1,397,173) (295,691)
     

    Other, net

    		  (979) (844) (1,036)
            

    Net cash provided by (used in) financing activities

    		  464,801  (789,979) 9,772 
     

    Effect of exchange rate changes on cash and cash equivalents

    		  (77,905) 21,528  42,146 
            

    Net increase (decrease) in cash and cash equivalents

    		  48,026  (235,888) 555,858 

    Cash and cash equivalents at beginning of year

    		  617,386  853,274  297,416 
            

    Cash and cash equivalents at end of year

    		 $665,412 $617,386 $853,274 
            

    Supplemental cash flow information

    		          
     

    Cash paid for interest

    		 $53,459 $49,266 $4,287 
     

    Income tax payments, net

    		  179,273  78,345  126,126 

    See notes to consolidated financial statements.

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    Expedia, Inc.

    Notes to Consolidated Financial Statements

    NOTE 1—Organization and Basis of Presentation

      Description of Business

            Expedia, Inc. and its subsidiaries provide travel products and services to leisure and corporate travelers in the United States and abroad. These travel products and services are offered through a diversified portfolio of brands including: Expedia.com®, hotels.com®, Hotwire.com™, the TripAdvisor® Media Network, our private label programs (Worldwide Travel Exchange and Interactive Affiliate Network), Classic Vacations, Expedia Local Expert, Egencia™ (formerly Expedia® Corporate Travel), eLong™, Inc. ("eLong") and Venere Net SpA ("Venere"). In addition, many of these brands have related international points of sale. We refer to Expedia, Inc. and its subsidiaries collectively as "Expedia," the "Company," "us," "we" and "our" in these consolidated financial statements.

      Spin-Off from IAC/InterActiveCorp

            On December 21, 2004, IAC/InterActiveCorp ("IAC") announced its plan to separate into two independent public companies. We refer to this transaction as the "Spin-Off." A new company, Expedia, Inc., was incorporated under Delaware law in April 2005, to hold substantially all of IAC's travel and travel-related businesses. On August 9, 2005, the Spin-Off from IAC was completed and Expedia, Inc. shares began trading on The Nasdaq Global Select Market ("NASDAQ") under the symbol "EXPE."

      Basis of Presentation

            The accompanying consolidated financial statements include Expedia, Inc., our wholly-owned subsidiaries, and entities we control, or in which we have a variable interest and are the primary beneficiary of expected cash profits or losses. We record our investments in entities that we do not control, but over which we have the ability to exercise significant influence, using the equity method. We record our investments in entities over which we do not have the ability to exercise significant influence using the cost method. We have eliminated significant intercompany transactions and accounts.

            We believe that the assumptions underlying our consolidated financial statements are reasonable. However, these consolidated financial statements do not present our future financial position, the results of our future operations and cash flows.

      Seasonality

            We generally experience seasonal fluctuations in the demand for our travel products and services. For example, traditional leisure travel bookings are generally the highest in the first three quarters as travelers plan and book their spring, summer and holiday travel. The number of bookings decreases in the fourth quarter. Because revenue in the merchant business is generally recognized when the travel takes place rather than when it is booked, revenue typically lags bookings by several weeks or longer. As a result, revenue is typically the lowest in the first quarter and highest in the third quarter. The macroeconomic downturn in the latter part of 2008 also affected our general revenue seasonality trends in the fourth quarter of 2008.

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    Expedia, Inc.

    Notes to Consolidated Financial Statements (Continued)

    NOTE 2—Significant Accounting Policies

      Consolidation

            Our consolidated financial statements include the accounts of Expedia, Inc., our wholly-owned subsidiaries, and entities for which we control a majority of the entity's outstanding common stock. We record minority interest in our consolidated financial statements to recognize the minority ownership interest in our consolidated subsidiaries. Minority interests in the earnings and losses of consolidated subsidiaries represent the share of net income or loss allocated to members or partners in our consolidated entities, which primarily includes the minority interest share of net income or loss from eLong.

            In addition, eLong, Inc. has variable interests in certain affiliated entities in China in order to comply with Chinese laws and regulations, which restricts foreign investment in the air-ticketing, travel agency and internet content provision businesses. Through a series of contractual agreements, eLong, Inc. is the primary beneficiary of the cash losses or profits of such variable interest entities. As such, although we do not own capital stock of the Chinese affiliates, based on our majority ownership of eLong, Inc., we consolidate their results.

            We have eliminated significant intercompany transactions and accounts in our consolidated financial statements.

      Accounting Estimates

            We use estimates and assumptions in the preparation of our consolidated financial statements in accordance with accounting principles generally accepted in the United States ("GAAP"). Our estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of our consolidated financial statements. These estimates and assumptions also affect the reported amount of net income or loss during any period. Our actual financial results could differ significantly from these estimates. The significant estimates underlying our consolidated financial statements include revenue recognition; recoverability of current and long-lived assets, intangible assets and goodwill; income and indirect taxes, such as potential settlements related to occupancy taxes; stock-based compensation and accounting for derivative instruments.

      Reclassifications

            We have reclassified prior period financial statements to conform to the current period presentation.

      Revenue Recognition

            We recognize revenue when it is earned and realizable based on the following criteria: persuasive evidence that an arrangement exists, services have been rendered, the price is fixed or determinable and collectibility is reasonably assured.

            We also evaluate the presentation of revenue on a gross versus a net basis through application of Emerging Issues Task Force No. ("EITF") 99-19,Reporting Revenue Gross as a Principal versus Net as an Agent. The consensus of this literature is that the presentation of revenue as "the gross amount billed to a customer because it has earned revenue from the sale of goods or services or the net amount retained (that is, the amount billed to a customer less the amount paid to a supplier) because it has earned a commission or fee" is a matter of judgment that depends on the relevant facts and

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    Expedia, Inc.

    Notes to Consolidated Financial Statements (Continued)

    circumstances. In making an evaluation of this issue, some of the factors that should be considered are: whether we are the primary obligor in the arrangement (strong indicator); whether we have general supply risk (before customer order is placed or upon customer return) (strong indicator); and whether we have latitude in establishing price. The guidance clearly indicates that the evaluations of these factors, which at times can be contradictory, are subject to significant judgment and subjectivity. If the conclusion drawn is that we perform as an agent or a broker without assuming the risks and rewards of ownership of goods, revenue should be reported on a net basis. For our primary revenue models, discussed below, we have determined net presentation is appropriate for the majority of revenue transactions.

            We offer travel products and services on a stand-alone and package basis primarily through two business models: the merchant model and the agency model.

            Under the merchant model, we facilitate the booking of hotel rooms, airline seats, car rentals and destination services from our travel suppliers and we are the merchant of record for such bookings.

            Under the agency model, we act as the agent in the transaction, passing reservations booked by the traveler to the relevant travel provider. We receive commissions or ticketing fees from the travel supplier and/or traveler. For agency airline, hotel and car transactions, we also receive fees from global distribution systems partners that control the computer systems through which these reservations are booked.

            Merchant Hotel.    Our travelers pay us for merchant hotel transactions prior to departing on their trip, generally when they book the reservation. We record the payment in deferred merchant bookings until the stay occurs, at which point we record the revenue. In certain nonrefundable, nonchangeable transactions where we have no significant post-delivery obligations, we record revenue when the traveler completes the transaction on our website, less a reserve for chargebacks and cancellations based on historical experience. Amounts received from customers are presented net of amounts paid to suppliers. In certain instances when a supplier invoices us for less than the cost we accrued, we generally recognize those amounts as revenue six months in arrears, net of an allowance, when we determine it is not probable that we will be required to pay the supplier, based on historical experience and contract terms.

            We generally contract in advance with lodging providers to obtain access to room allotments at wholesale rates. Certain contracts specifically identify the number of potential rooms and the negotiated rate of the rooms to which we may have access over the terms of the contracts, which generally range from one to three years. Other contracts are not specific with respect to the number of rooms and the rates of the rooms to which we may have access over the terms of the contracts. In either case we may return unbooked hotel room allotments with no obligation to the lodging providers within a period specified in each contract. For hotel rooms that are cancelled by the traveler after the specified period of time, we charge the traveler a cancellation fee or penalty that is at least equal to the amount a hotel may invoice us for the cancellation.

            Merchant Air.    Generally, we determine the ticket price for merchant air transactions. We pay the cost of the airline ticket generally within two weeks after booking. We record cash paid by the traveler as deferred merchant bookings and the cost of the airline ticket as prepaid merchant bookings. When the flight occurs, we record the difference between the deferred merchant bookings and the prepaid merchant bookings as revenue on a net basis.

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    Expedia, Inc.

    Notes to Consolidated Financial Statements (Continued)

            When we have nonrefundable and generally noncancelable merchant air transactions, with no significant post-delivery obligations, we record revenue upon booking. We record a reserve for chargebacks and cancellations at the time of the transaction based on historical experience.

            Agency Air, Hotel, Car and Cruise.    Our agency revenue comes from airline ticket transactions, certain hotel transactions as well as cruise and car rental reservations. We record agency revenue on air transactions when the traveler books the transaction, as we have no significant post-delivery obligations. We generally record agency revenue on hotel reservations when the stay occurs or on receipt of commissions from individual suppliers. We record agency revenue on cruise and car rental reservations either on an accrual basis for payments from a commission clearinghouse, or on receipt of commissions from an individual supplier. We record an allowance for cancellations and chargebacks on this revenue based on historical experience.

            Click-Through Fees.    We record revenue from click-through fees charged to our travel partners for traveler leads sent to the travel partners' websites. We record revenue from click-through fees after the traveler makes the click-through to the related travel partners' websites.

            Advertising.    We record advertising revenue ratably over the advertising period or upon delivery of advertising impressions, depending on the terms of the advertising contract.

            Other.    We record revenue from all other sources either upon delivery or when we provide the service.

      Cash and Cash Equivalents

            Our cash and cash equivalents include cash and liquid financial instruments with maturities of 90 days or less when purchased.

      Short-term Investments

            Our short-term investments consist of time deposits with financial institutions held by eLong with maturities greater than 90 days but less than one year.

      Accounts Receivable

            Accounts receivable are generally due within thirty days and are recorded net of an allowance for doubtful accounts. We consider accounts outstanding longer than the contractual payment terms as past due. We determine our allowance by considering a number of factors, including the length of time trade accounts receivable are past due, previous loss history, a specific customer's ability to pay its obligations to us, and the condition of the general economy and industry as a whole.

      Prepaid Expenses and Other Current Assets

            At December 31, 2008, prepaid expenses and other current assets included $16 million in redemptions of money market holdings due from the Reserve Primary Fund (the "Fund"). The Fund is currently being liquidated due to the Reserve's September 16, 2008 announcement that the Fund had a net asset value less than $1.00 and ensuing significant redemption requests. As a result, during the third quarter of 2008, we reclassified $80 million in redemptions due from the Fund from cash and cash equivalents to prepaid expenses and other current assets, which was net of an approximate $1 million allowance for our estimated pro rata share of losses related to the Fund's write-down of debt security holdings of Lehman Brothers Holdings, Inc. We received $64 million in distributions from the Fund

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    Notes to Consolidated Financial Statements (Continued)

    during the fourth quarter of 2008. The timing of receipt of the remaining proceeds cannot be determined at this time; however, the maturities of the underlying investments are within one year. In addition, under the Fund's plan of liquidation announced December 3, 2008, future distributions will continue to be made on a pro-rata basis up to the amount of a special reserve, which will be established to satisfy legal and accounting fees of the Fund. As the Fund has not yet quantified the amount of the special reserve, there is no way to determine our pro-rata share of such reserve and we may be required to record additional losses in future periods.

      Property and Equipment

            We record property and equipment at cost, net of accumulated depreciation and amortization. We also capitalize certain costs incurred related to the development of internal use software in accordance with Statement of Position 98-1,Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, and EITF No. 00-02,Accounting for Website Development Costs. We capitalize costs incurred during the application development stage related to the development of internal use software. We expense costs incurred related to the planning and post-implementation phases of development as incurred.

            We compute depreciation using the straight-line method over the estimated useful lives of the assets, which is three to five years for computer equipment, capitalized software development and furniture and other equipment. We amortize leasehold improvement using the straight-line method, over the shorter of the estimated useful life of the improvement or the remaining term of the lease.

            In accordance with Statement of Financial Accounting Standards ("SFAS") No. 143,Accounting for Asset Retirement Obligations, we establish assets and liabilities for the present value of estimated future costs to return certain of our leased facilities to their original condition. Such assets are depreciated over the lease period into operating expense, and the recorded liabilities are accreted to the future value of the estimated restoration costs.

      Recoverability of Goodwill and Indefinite-Lived Intangible Assets

            Goodwill is assigned to reporting units that are expected to benefit from the synergies of the business combination as of the acquisition date. We assess goodwill and indefinite-lived intangible assets, neither of which is amortized, for impairment annually as of October 1, or more frequently, if events and circumstances indicate impairment may have occurred. See Note 5—Goodwill and Intangible Assets, Net for discussion of impairment of goodwill and indefinite-lived assets in 2008 and 2006.

            In the evaluation of goodwill for impairment, we first compare the fair value of the reporting unit to the carrying value. If the carrying value of a reporting unit exceeds its fair value, the goodwill of that reporting unit is potentially impaired and we proceed to step two of the impairment analysis. In step two of the analysis, we will record an impairment loss equal to the excess of the carrying value of the reporting unit's goodwill over its implied fair value should such a circumstance arise.

            We generally base our measurement of fair value of reporting units on a blended analysis of the present value of future discounted cash flows and market valuation approach. The discounted cash flows model indicates the fair value of the reporting units based on the present value of the cash flows that we expect the reporting units to generate in the future. Our significant estimates in the discounted cash flows model include: our weighted average cost of capital; long-term rate of growth and profitability of our business; and working capital effects. The market valuation approach indicates the

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    Expedia, Inc.

    Notes to Consolidated Financial Statements (Continued)

    fair value of the business based on a comparison of the Company to comparable publicly traded firms in similar lines of business. Our significant estimates in the market approach model include identifying similar companies with comparable business factors such as size, growth, profitability, risk and return on investment and assessing comparable revenue and operating income multiples in estimating the fair value of the reporting units.

            We believe the weighted use of discounted cash flows and market approach is the best method for determining the fair value of our reporting units because these are the most common valuation methodologies used within the travel and internet industries; and the blended use of both models compensates for the inherent risks associated with either model if used on a stand-alone basis.

            In addition to measuring the fair value of our reporting units as described above, we consider the combined carrying and fair values of our reporting units in relation to the Company's total fair value of equity plus debt as of the assessment date. Our equity value assumes our fully diluted market capitalization, using either the stock price on the valuation date or the average stock price over a range of dates around the valuation date, plus an estimated acquisition premium which is based on observable transactions of comparable companies. The debt value is based on the highest value expected to be paid to repurchase the debt, which can be fair value, principal or principal plus a premium depending on the terms of each debt instrument.

            In the evaluation of indefinite-lived intangible assets, an impairment charge is recorded for the excess of the carrying value of indefinite-lived intangible assets over their fair value. We base our measurement of fair value of indefinite-lived intangible assets, which primarily consist of trade name and trademarks, using the relief-from-royalty method. This method assumes that the trade name and trademarks have value to the extent that their owner is relieved of the obligation to pay royalties for the benefits received from them.

      Recoverability of Intangible Assets with Definite Lives and Other Long-Lived Assets

            Intangible assets with definite lives and other long-lived assets are carried at cost and are amortized on a straight-line basis over their estimated useful lives of two to twelve years. We review the carrying value of long-lived assets or asset groups, including property and equipment, to be used in operations whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. Factors that would necessitate an impairment assessment include a significant adverse change in the extent or manner in which an asset is used, a significant adverse change in legal factors or the business climate that could affect the value of the asset, or a significant decline in the observable market value of an asset, among others. If such facts indicate a potential impairment, we would assess the recoverability of an asset group by determining if the carrying value of the asset group exceeds the sum of the projected undiscounted cash flows expected to result from the use and eventual disposition of the assets over the remaining economic life of the primary asset in the asset group. If the recoverability test indicates that the carrying value of the asset group is not recoverable, we will estimate the fair value of the asset group using appropriate valuation methodologies which would typically include an estimate of discounted cash flows. Any impairment would be measured as the difference between the asset groups carrying amount and its estimated fair value. See Note 5—Goodwill and Intangible Assets, Net for discussion of impairment of other long-lived assets in 2008.

            Assets held for sale, to the extent we have any, are reported at the lower of cost or fair value less costs to sell.

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    Expedia, Inc.

    Notes to Consolidated Financial Statements (Continued)

      Long-term Investments

            We record investments, which are non-marketable, using the cost basis when we do not have the ability to exercise significant influence over the investee and generally when our ownership in the investee is less than 20%. We record investments using the equity method when we have the ability to exercise significant influence over the investee.

            We periodically evaluate the recoverability of investments and record a write-down to fair value if a decline in value is determined to be other-than-temporary.

      Income Taxes

            In accordance with SFAS No. 109,Accounting for Income Taxes, we record income taxes under the liability method. Deferred tax assets and liabilities reflect our estimation of the future tax consequences of temporary differences between the carrying amounts of assets and liabilities for book and tax purposes. We determine deferred income taxes based on the differences in accounting methods and timing between financial statement and income tax reporting. Accordingly, we determine the deferred tax asset or liability for each temporary difference based on the enacted tax rates expected to be in effect when we realize the underlying items of income and expense. We consider many factors when assessing the likelihood of future realization of our deferred tax assets, including our recent earnings experience by jurisdiction, expectations of future taxable income, and the carryforward periods available to us for tax reporting purposes, as well as other relevant factors. We may establish a valuation allowance to reduce deferred tax assets to the amount we believe is more likely than not to be realized. Due to inherent complexities arising from the nature of our businesses, future changes in income tax law, tax sharing agreements or variances between our actual and anticipated operating results, we make certain judgments and estimates. Therefore, actual income taxes could materially vary from these estimates.

            On January 1, 2007, we adopted Financial Accounting Standards Board ("FASB") Interpretation No. 48,Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109 ("FIN 48"). FIN 48 gives guidance related to the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and requires that we recognize in our financial statements the impact of a tax position, if that position is more likely than not to be sustained upon an examination, based on the technical merits of the position.

      Occupancy Tax

            Some states and localities impose a transient occupancy or accommodation tax, or a form of sales tax, on the use or occupancy of hotel accommodations. Generally, hotels charge taxes based on the room rate paid to the hotel and remit these taxes to the various tax authorities. When a customer books a room through one of our travel services, we collect a tax recovery charge from the customer which we pay to the hotel. We do not collect or remit occupancy taxes, nor do we pay occupancy taxes to the hotel operator on the portion of the customer payment we retain. Some jurisdictions have questioned our practice in this regard. While the applicable tax provisions vary among the jurisdictions, we generally believe that we are not required to collect and remit such occupancy taxes. We are engaged in discussions with tax authorities in various jurisdictions to resolve this issue. Some tax authorities have brought lawsuits or have levied assessments asserting that we are required to collect and remit occupancy tax. The ultimate resolution in all jurisdictions cannot be determined at this time. We have established a reserve for the potential settlement of issues related to hotel occupancy taxes.

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    Expedia, Inc.

    Notes to Consolidated Financial Statements (Continued)

      Presentation of Taxes in the Income Statement

            We present taxes that we collect from customers and remit to government authorities on a net basis in our consolidated statements of operations.

      Derivative Instruments

            Derivative instruments are carried at fair value on our consolidated balance sheets.

            We had designated cross currency swap agreements as cash flow hedges of certain inter-company loan agreements denominated in currencies other than the lending subsidiaries' functional currency (the "hedged items"). The hedges were determined to be highly effective, at designation and up until settlement during the third quarter of 2008. As such, we recorded the total change in the fair value of the hedges in other comprehensive income ("OCI") each period, and concurrently reclassify a portion of the gain or loss to Other, net to perfectly offset gains or losses related to transactional remeasurement of the hedged items.

            We report the change in the fair value of derivative instruments, which primarily consist of foreign currency forward contracts as of December 31, 2008, that do not qualify for hedge accounting treatment in Other, net. We do not hold or issue financial instruments for speculative or trading purposes.

            For additional information about derivative instruments, see Note 7—Derivative Instruments.

      Foreign Currency Translation and Transaction Gains and Losses

            Certain of our operations outside of the United States use the related local currency as their functional currency. We translate revenue and expense at average rates of exchange during the period. We translate assets and liabilities at the rates of exchange as of the consolidated balance sheet dates and include foreign currency translation gains and losses as a component of accumulated OCI. Due to the nature of our operations and our corporate structure, we also have subsidiaries that have significant transactions in foreign currencies other than their functional currency. We record transaction gains and losses in our consolidated statements of operations related to the recurring remeasurement and settlement of such transactions.

            To the extent practicable, we attempt to minimize this exposure by maintaining natural hedges between our current assets and current liabilities of similarly denominated foreign currencies. Additionally, during the third and fourth quarter of 2008, we began using foreign currency forward contracts to economically hedge certain merchant revenue exposures and in lieu of holding certain foreign currency cash for the purpose of economically hedging our foreign currency-denominated merchant accounts payable and deferred merchant bookings balances. These instruments are typically short-term and are recorded at fair value with gains and losses recorded in Other, net. Valuation of the foreign currency forward contracts is based on foreign currency exchange rates in active markets; thus, we measure the fair value of these contracts under a Level 2 input as defined by SFAS No. 157,Fair Value Measurements. As of December 31, 2008, we had a net forward liability of $1 million recorded in accrued expenses and other current liabilities.

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    Expedia, Inc.

    Notes to Consolidated Financial Statements (Continued)

      Debt Issuance Costs

            We defer costs we incur to issue debt and amortize these costs to interest expense over the term of the debt or, when the debt can be redeemed at the option of the holders, over the term of the redemption option.

      Marketing Promotions

            We periodically provide incentive offers to our customers to encourage booking of travel products and services. Generally, our incentive offers are as follows:

            Current Discount Offers.    These promotions include dollar off discounts to be applied against current purchases. We record the discounts as reduction in revenue at the date we record the corresponding revenue transaction.

            Inducement Offers.    These promotions include discounts granted at the time of a current purchase to be applied against a future qualifying purchase. We treat inducement offers as a reduction to revenue based on estimated future redemption rates. We allocate the discount amount between the current purchase and the potential future purchase based on our expected relative value of the transactions. We estimate our redemption rates using our historical experience for similar inducement offers.

            Concession Offers.    These promotions include discounts to be applied against a future purchase to maintain customer satisfaction. Upon issuance, we record these concession offers as a reduction to revenue based on estimated future redemption rates. We estimate our redemption rates using our historical experience for concession offers.

      Advertising Expense

            We incur advertising expense consisting of offline costs, including television and radio advertising, and online advertising expense to promote our brands. We expense the production costs associated with advertisements in the period in which the advertisement first takes place. We expense the costs of communicating the advertisement (e.g., television airtime) as incurred each time the advertisement is shown. For the years ended December 31, 2008, 2007 and 2006, our advertising expense was $598 million, $539 million and $427 million. As of December 31, 2008 and 2007, we had $10 million and $8 million of prepaid marketing expenses included in prepaid expenses and other current assets.

      Stock-Based Compensation

            We account for stock-based compensation in accordance with SFAS No. 123(R),Share-Based Payment, and related guidance. We measure and amortize the fair value of restricted stock units, stock options and warrants as follows:

            Restricted Stock Units.    Restricted stock units ("RSU") are stock awards that are granted to employees entitling the holder to shares of common stock as the award vests, typically over a five-year period. We measure the value of RSUs at fair value based on the number of shares granted and the quoted price of our common stock at the date of grant. We amortize the fair value, net of estimated forfeitures, as stock-based compensation expense over the vesting term on a straight-line basis. We record RSUs that may be settled by the holder in cash, rather than shares, as a liability and we remeasure these instruments at fair value at the end of each reporting period. Upon settlement of

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    Notes to Consolidated Financial Statements (Continued)


    these awards, our total compensation expense recorded over the vesting period of the awards will equal the settlement amount, which is based on our stock price on the settlement date.

            Performance-based RSUs vest upon achievement of certain company-based performance conditions. On the date of grant, we determine the fair value of the performance-based award based on the fair value of our common stock at that time and we assess whether it is probable that the performance targets will be achieved. If assessed as probable, we record compensation expense for these awards over the estimated performance period using the accelerated method. At each reporting period, we reassess the probability of achieving the performance targets and the performance period required to meet those targets. The estimation of whether the performance targets will be achieved and of the performance period required to achieve the targets requires judgment, and to the extent actual results or updated estimates differ from our current estimates, the cumulative effect on current and prior periods of those changes will be recorded in the period estimates are revised, or the change in estimate will be applied prospectively depending on whether the change affects the estimate of total compensation cost to be recognized or merely affects the period over which compensation cost is to be recognized. The ultimate number of shares issued and the related compensation expense recognized will be based on a comparison of the final performance metrics to the specified targets.

            Stock Options and Warrants.    We measure the value of stock options and warrants issued or modified, including unvested options assumed in acquisitions, on the grant date (or modification or acquisition dates, if applicable) at fair value, using the Black-Scholes option valuation model. We amortize the fair value, net of estimated forfeitures, over the remaining vesting term on a straight-line basis.

            Estimates of fair value are not intended to predict actual future events or the value ultimately realized by employees who receive these awards, and subsequent events are not indicative of the reasonableness of our original estimates of fair value. In determining the estimated forfeiture rates for stock-based awards, we periodically conduct an assessment of the actual number of equity awards that have been forfeited to date as well as those expected to be forfeited in the future. We consider many factors when estimating expected forfeitures, including the type of award, the employee class and historical experience. The estimate of stock awards that will ultimately be forfeited requires significant judgment and to the extent that actual results or updated estimates differ from our current estimates, such amounts will be recorded as a cumulative adjustment in the period such estimates are revised.

      Earnings Per Share

            We compute basic earnings per share by taking net income (loss) available to common shareholders divided by the weighted average number of common and Class B common shares outstanding during the period excluding restricted stock and stock held in escrow. Diluted earnings per share include the potential dilution that could occur from stock-based awards and other stock-based commitments using the treasury stock or the as if converted methods, as applicable. For additional information on how we compute earnings per share, see Note 12—Earnings Per Share.

      Fair Value of Financial Instruments

            The carrying amounts of cash and cash equivalents, restricted cash and cash equivalents and short-term investments reported on our consolidated balance sheets approximate fair value as we maintain them with various high-quality financial institutions. The accounts receivable are short-term in nature and are generally settled shortly after the sale.

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    Expedia, Inc.

    Notes to Consolidated Financial Statements (Continued)

      Certain Risks and Concentrations

            Our business is subject to certain risks and concentrations including dependence on relationships with travel suppliers, primarily airlines and hotels, dependence on third-party technology providers, exposure to risks associated with online commerce security and credit card fraud. We also rely on global distribution system partners and third-party service providers for certain fulfillment services, including one third-party service provider for which we accounted for approximately 41% of its total revenue for the year ended December 31, 2007 and approximately 35% of its total revenue for the nine months ended September 30, 2008.

            Financial instruments, which potentially subject us to concentration of credit risk, consist primarily of cash and cash equivalents. We maintain some cash and cash equivalents balances with financial institutions that are in excess of Federal Deposit Insurance Corporation insurance limits. Our cash and cash equivalents are primarily composed of U.S. government obligations and treasury funds as well as interest bearing bank account balances denominated in U.S. dollars, euros and British pound sterling.

      Contingent Liabilities

            We have a number of regulatory and legal matters outstanding, as discussed further in Note 14—Commitments and Contingencies. Periodically, we review the status of all significant outstanding matters to assess the potential financial exposure. When (i) it is probable that an asset has been impaired or a liability has been incurred and (ii) the amount of the loss can be reasonably estimated, we record the estimated loss in our consolidated statements of operations. We provide disclosure in the notes to the consolidated financial statements for loss contingencies that do not meet both these conditions if there is a reasonable possibility that a loss may have been incurred that would be material to the financial statements. Significant judgment is required to determine the probability that a liability has been incurred and whether such liability is reasonably estimable. We base accruals made on the best information available at the time which can be highly subjective. The final outcome of these matters could vary significantly from the amounts included in the accompanying consolidated financial statements.

      Recently Adopted Accounting Pronouncements

            On January 1, 2008, we adopted certain provisions of SFAS No. 157,Fair Value Measurements ("SFAS 157"). SFAS 157 defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. SFAS 157 applies when another standard requires or permits assets or liabilities to be measured at fair value. Accordingly, SFAS 157 does not require any new fair value measurements. We will adopt the provisions of SFAS 157 as it relates to nonfinancial assets and liabilities that are not recognized or disclosed at fair value on a recurring basis on January 1, 2009. The partial adoption of SFAS 157 did not materially impact, nor do we expect the full adoption to materially impact, our consolidated financial statements.

            On January 1, 2008, we adopted SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities—Including an Amendment of SFAS Statement No. 115 ("SFAS 159"). SFAS 159 permits an entity to choose to measure many financial instruments and certain other items at fair value at specified election dates as defined in the standard. Subsequent unrealized gains and losses on items for which the fair value option has been elected will be reported in earnings. As we did not elect fair value treatment for qualifying instruments that existed as of January 1, 2008, the adoption of this Statement did not have an impact on our consolidated financial statements. We may elect to measure qualifying instruments at fair value in the future.

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    Expedia, Inc.

    Notes to Consolidated Financial Statements (Continued)

      New Accounting Pronouncements

            In December 2007, the FASB issued SFAS No. 141R,Business Combinations ("SFAS 141R"), which replaces SFAS 141. SFAS 141R applies to all transactions or other events in which an entity obtains control of one or more businesses and requires that all assets and liabilities of an acquired business as well as any noncontrolling interest in the acquiree be recorded at their fair values at the acquisition date. Contingent consideration arrangements will be recognized at their acquisition date fair values, with subsequent changes in fair value generally reflected in earnings. Pre-acquisition contingencies will also typically be recognized at their acquisition date fair values. In subsequent periods, contingent liabilities will be measured at the higher of their acquisition date fair values or the estimated amounts to be realized. The Statement is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. We do not expect the adoption of SFAS 141R will have a material impact on our consolidated financial statements.

            In December 2007, the FASB issued SFAS No. 160,Accounting and Reporting on Non-controlling Interest in Consolidated Financial Statements, an Amendment of ARB 51 ("SFAS 160"), which is effective for fiscal years beginning after December 15, 2008. SFAS 160 states that accounting and reporting for minority interests will be recharacterized as noncontrolling interests and classified as a component of equity. The calculation of earnings per share will continue to be based on income amounts attributable to the parent. FAS 160 applies to all entities that prepare consolidated financial statements, except not-for-profit organizations, but will affect only those entities that have an outstanding noncontrolling interest in one or more subsidiaries or that deconsolidate a subsidiary. Beginning on January 1, 2009 upon adoption of SFAS 160, we will recharacterize our minority interest as a noncontrolling interest and classify it as a component of equity in our consolidated financial statements with the exception of shares redeemable at the option of the minority holders, which will remain an obligation outside of stockholders' equity.

            In March 2008, the FASB issued SFAS No. 161,Disclosures about Derivative Instruments and Hedging Activities ("SFAS 161"), which is effective for fiscal years and interim periods beginning after November 15, 2008. SFAS 161 requires enhanced disclosures about an entity's derivative and hedging activities, including how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for and how derivative instruments and related hedged items affect an entity's financial position, financial performance, and cash flows. We do not expect the adoption of SFAS 161 will have a material impact on our consolidated financial statements.

    NOTE 3—Acquisitions and Other Investments

            In 2008, we acquired four online travel media content companies, one corporate travel company and two online travel product and service companies, which includes Venere, an online travel provider based in Italy that focuses on hotel reservations under an agency model. The purchase price of these companies as well as contingent purchase consideration under prior acquisitions and other acquisition-related costs totaled $475 million, of which $465 million was paid in cash and $10 million was accrued

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    Notes to Consolidated Financial Statements (Continued)


    as of December 31, 2008. The following table summarizes the allocation of the purchase price for all acquisitions made in 2008, in thousands:

    Goodwill

    		 $328,449 

    Intangible assets with definite lives(1)

    		  112,968 

    Intangible assets with indefinite lives

    		  47,641 

    Net liabilities and minority interests acquired, which includes $21,480 of cash aquired

    		  (14,486)
        
     

    Total

    		 $474,572 
        
        (1)
        Acquired intangible assets primarily consist of supplier relationship assets with a weighted average life of 10.6 years and technology assets with a weighted average life of 3 years. In total, the weighted average life of acquired intangible assets was 8.3 years.

            The purchase price allocation of these acquisitions is preliminary and subject to revision, and any change to the fair value of net assets acquired will lead to a corresponding change to the purchase price allocable to goodwill. The results of operations of each of the acquired businesses have been included in our consolidated results from each transaction closing date forward; their effect on consolidated revenue and operating loss during 2008 was not significant.

            In one of these 2008 transactions, we acquired a 74% controlling interest with certain rights whereby we may acquire, and the minority shareholders may sell to us, the additional shares of the company at fair value at various times through 2011. In another of these 2008 transactions, we acquired an 86% controlling interest with certain rights whereby we may acquire, and the minority shareholders may sell to us, the additional shares of the company at fair value, or at an adjusted fair value at our option, during a 30-day period beginning October 1, 2012. Future changes in fair value of the shares for which the minority holders may sell to us above the initial minority interest basis will be recorded to the minority interest and as charges or credits to retained earnings (deficit).

            In 2007, we acquired three travel-related companies. The purchase price of these and other acquisition related costs totaled $152 million, $60 million of which we paid in cash and $92 million of which was accrued at December 31, 2007 as a result of the financial performance of one of the acquired companies during 2007. The accrued purchase consideration represented $92 million of $100 million total additional purchase price that could be achieved based on the annual results of 2007 or 2008, or the two periods combined. During 2008, we paid $93 million of the additional purchase price based on the annual results of 2007. In addition, we accrued the remaining $7 million based on the annual results of 2008 to be paid in 2009 and this amount was included within the 2008 total purchase price above. As a result of these acquisitions, we recorded $126 million in goodwill and $18 million of intangible assets with definite lives. The results of operations of each of the acquired businesses have been included in our consolidated results from each transaction closing date forward; their effect on consolidated net revenue and operating income during 2007 was not significant.

            During 2007, we also acquired a 50% ownership interest in a travel company for $26 million in cash. We include this investment in Long-term investments and other assets and account for it under the equity-method. The investment agreement contains certain rights, whereby we may acquire and the investee may sell to us the additional shares of the company, at fair value or at established multiples of future earnings at our discretion, at various times beginning in the first quarter of 2009 through 2013. We have also entered into a commitment to provide the investee a $10 million revolving operating line

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    Notes to Consolidated Financial Statements (Continued)

    of credit and a credit facility for up to $20 million. As of the end of 2008 or at any time and from time to time thereafter, any amounts due under the credit facility are convertible, at our option, into shares of the company at a premium to the then fair market value. The revolving operating line of credit had $2 million drawn against it and no amounts were drawn against the credit facility as of December 31, 2008.

            In 2006, we purchased the remaining 4.9% minority ownership in TripAdvisor for $18 million in cash.

    NOTE 4—Property and Equipment, Net

            Our property and equipment consists of the following:

     
    		 December 31, 
     
    		 2008 2007 
     
    		 (In thousands)
    		 

    Capitalized software development

    		 $286,935 $230,168 

    Computer equipment

    		  103,866  74,569 

    Furniture and other equipment

    		  57,423  40,706 

    Leasehold improvements

    		  64,620  30,746 
          

    		  512,844  376,189 

    Less: accumulated depreciation

    		  (292,650) (250,094)

    Projects in progress

    		  27,760  53,395 
          

    Property and equipment, net

    		 $247,954 $179,490 
          

            As of December 31, 2008 and 2007, our recorded capitalized software development costs, net of accumulated amortization, were $122 million and $113 million. For the years ended December 31, 2008, 2007 and 2006, we recorded amortization of capitalized software development costs of $47 million, $36 million and $28 million, most of which is included in technology and content expenses.

    NOTE 5—Goodwill and Intangible Assets, Net

            We performed our annual impairment assessment for goodwill and indefinite-lived intangible assets as of October 1, 2008 and determined we had no impairment as of that date. However, during the fourth quarter of 2008, we experienced a significant decline in our stock price and operating results in part due to an increased negative impact of foreign exchange rates and the continued weakness in the macroeconomic environment. Based on these and other contributing factors, we concluded that sufficient indicators existed to require us to perform an interim assessment of goodwill and indefinite-lived intangible assets as of December 1, 2008. Accordingly, we performed an interim first step of our impairment assessment for each of our reporting units and determined there was a potential impairment of goodwill in certain reporting units. Therefore, we performed the second step of the assessment in which we compared the implied fair value of those reporting unit's goodwill to the book value of that goodwill. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. That is, the estimated fair value of the reporting unit is allocated to all of the assets and liabilities of that unit (including both recognized and unrecognized intangible assets) as if the reporting unit had been acquired in a business combination and the estimated fair value of the reporting unit was the purchase price paid. If the carrying amount

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    Notes to Consolidated Financial Statements (Continued)

    of the reporting unit's goodwill exceeds the implied fair value of that unit's goodwill, an impairment loss is recognized in an amount equal to that excess.

            We measured the fair value of each of our reporting units and both our indefinite-lived and definite lived intangible assets using accepted valuation techniques as described above in Note 2—Significant Accounting Policies. The significant estimates used included our weighted average cost of capital, long-term rate of growth and profitability of our business, and working capital effects. Our assumptions are based on the actual historical performance of each of the reporting units and take into account the recent weakening of operating results and implied risk premiums based on market prices of our equity and debt as of the assessment date. To validate the reasonableness of the reporting unit fair values, we reconcile the aggregate fair values of the reporting units determined in step one to the enterprise market capitalization. Enterprise market capitalization includes, among other factors, the fully diluted market capitalization of our stock, an acquisition premium based on historical data from acquisitions within the same or similar industries and the appropriate redemption values of our debt. In performing the reconciliation we may, depending on the volatility of the market value of our stock price, use either the stock price on the valuation date or the average stock price over a range of dates around that date and consider such other quantitative and qualitative factors we consider relevant, which may change depending on the date for which the assessment is made. This assessment resulted in the recognition in the fourth quarter of 2008 of a loss on impairment of long-term assets of approximately $3 billion, which consists of $2.8 billion of goodwill and $223 million of indefinite-lived trade names. A deferred tax benefit of $189 million was recognized as a result of these charges.

            We determined that the adverse change in the business climate discussed above was also an indicator requiring the testing of our long-lived assets for recoverability and performed this test as of December 1, 2008. We tested the long-lived assets of our reporting units for recoverability based on a comparison of the respective aggregate values of their undiscounted cash flows to the respective carrying values. The results of the evaluation indicated that the carrying values of the related assets were recoverable. In addition to the above impairment analysis, during the fourth quarter of 2008, we wrote off $11 million related to capitalized software costs based on the abandonment of the related project.

            As a result of continued adverse conditions in the markets in which we operate, we will continue to monitor goodwill and long-lived intangible assets, as well as long-lived tangible assets, for possible future impairment. We cannot assure that these assets will not be further impaired in future periods.

            The following table presents our goodwill and intangible assets as of December 31, 2008 and 2007:

     
    		 December 31, 
     
    		 2008 2007 
     
    		 (In thousands)
    		 

    Goodwill

    		 $3,538,569 $6,006,338 

    Intangible assets with indefinite lives

    		  689,541  867,246 

    Intangible assets with definite lives, net

    		  143,878  103,511 
          

    		 $4,371,988 $6,977,095 
          

            Our indefinite-lived intangible assets relate principally to trade names and trademarks acquired in various acquisitions. Of the $223 million impairment charge in the fourth quarter of 2008, $128 million related to trade names in our North America segment, $73 million in our Europe segment and $22 million in our Asia Pacific segment. In the third quarter of 2006, based on lower than expected

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    Expedia, Inc.

    Notes to Consolidated Financial Statements (Continued)


    year-to-date revenue growth, we determined that our indefinite-lived trade name intangible asset related to Hotwire, part of our North America segment, was impaired based on a valuation of that asset and recognized an impairment charge of $47 million.

            The following table presents the changes in goodwill by reportable segment:

     
    		 North America Europe Other(1) Total 
     
    		 (In thousands)
    		 

    Balance as of January 1, 2007

    		 $4,740,698 $1,021,351 $99,243 $5,861,292 
     

    Additions

    		  140,428  —  201  140,629 
     

    Deductions

    		  (9,402) —  —  (9,402)
     

    Foreign exchange translation

    		  —  7,778  6,041  13,819 
              

    Balance as of December 31, 2007

    		 $4,871,724 $1,029,129 $105,485 $6,006,338 
     

    Additions

    		  134,267  181,777  12,405  328,449 
     

    Impairment charge

    		  (1,982,000) (758,900) (21,200) (2,762,100)
     

    Other deductions

    		  (2,823) —  —  (2,823)
     

    Foreign exchange translation

    		  (3,765) (22,126) (5,404) (31,295)
              

    Balance as of December 31, 2008

    		 $3,017,403 $429,880 $91,286 $3,538,569 
              
    (1)
    Other includes Asia Pacific and Egencia.

            In 2008 and 2007, the additions to goodwill relate primarily to our acquisitions as described in Note 3—Acquisitions and Other Investments. In addition, basis adjustments resulting from the implementation of FIN 48 also contributed to the increase in 2007. The deductions from goodwill for both 2008 and 2007 primarily relate to the impairments discussed above as well as the income tax benefit realized pursuant to the exercise of stock options assumed in business acquisitions that were vested at the transaction date and are treated as a reduction in purchase price when the deductions are realized.

            The following table presents the components of our intangible assets with definite lives as of December 31, 2008 and 2007:

     
    		 December 31, 2008 December 31, 2007 
     
    		 Cost Accumulated
    Amortization    		 Net Cost Accumulated
    Amortization    		 Net 
     
    		 (In thousands)
    		 

    Supplier relationships

    		 $280,484 $(220,612)$59,872 $212,514 $(206,464)$6,050 

    Technology

    		  221,166  (195,941) 25,225  203,028  (183,082) 19,946 

    Distribution agreements

    		  177,426  (177,155) 271  177,426  (154,091) 23,335 

    Affiliate agreements

    		  34,782  (18,381) 16,401  33,049  (14,899) 18,150 

    Customer lists

    		  26,540  (21,895) 4,645  26,549  (20,723) 5,826 

    Domain names

    		  11,678  (8,500) 3,178  10,940  (5,729) 5,211 

    Other

    		  81,659  (47,373) 34,286  61,809  (36,816) 24,993 
                  
     

    Total

    		 $833,735 $(689,857)$143,878 $725,315 $(621,804)$103,511 
                  

            Amortization expense was $69 million, $78 million and $111 million for the years ended December 31, 2008, 2007 and 2006. The estimated future amortization expense related to intangible

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    Expedia, Inc.

    Notes to Consolidated Financial Statements (Continued)


    assets with definite lives as of December 31, 2008, assuming no subsequent impairment of the underlying assets, is as follows, in thousands:

    2009

    		 $36,143 

    2010

    		  28,175 

    2011

    		  19,966 

    2012

    		  14,498 

    2013

    		  9,811 

    2014 and thereafter

    		  35,285 
        
     

    Total

    		 $143,878 
        

    NOTE 6—Debt

            The following table sets forth our outstanding debt:

     
    		 December 31,
    2008    		 December 31,
    2007    		 
     
    		 (In thousands)
    		 

    8.5% senior notes due 2016, net of discount

    		 $394,548 $— 

    7.456% senior notes due 2018

    		  500,000  500,000 
          
     

    Long-term debt

    		  894,548  500,000 

    Credit facility

    		  650,000  585,000 
          
     

    Total long-term indebtedness

    		 $1,544,548 $1,085,000 
          

      Long-term Debt

            In June 2008, we privately placed $400 million of 8.5% senior unsecured notes due in July 2016 (the "8.5% Notes"). The 8.5% Notes were issued at 98.572% of par resulting in a discount, which is being amortized over their life. Interest is payable semi-annually in January and July of each year, beginning January 1, 2009. The 8.5% Notes are repayable in whole or in part upon the occurrence of a change of control, at the option of the holders, at a purchase price in cash equal to 101% of the principal plus accrued interest. Prior to July 1, 2011, in the event of a qualified equity offering, we may redeem up to 35% of the 8.5% Notes at a redemption price of 108.5% of the principal plus accrued interest. Additionally, we may redeem the 8.5% Notes prior to July 1, 2012 in whole or in part at a redemption price of 100% of the principal plus accrued interest, plus a "make-whole" premium. On or after July 1, 2012, we may redeem the 8.5% Notes in whole or in part at specified prices ranging from 104.250% to 100% of the principal plus accrued interest.

            Our $500 million in registered senior unsecured notes outstanding at December 31, 2008 are due in August 2018 and bear interest at 7.456% (the "7.456% Notes"). Interest is payable semi-annually in February and August of each year. The 7.456% Notes are repayable in whole or in part on August 15, 2013, at the option of the holders of such 7.456% Notes, at 100% of the principal amount plus accrued interest. We may redeem the 7.456% Notes in accordance with the terms of the agreement, in whole or in part at any time at our option.

            The fair value of our 7.456% Notes was approximately $365 million and $517 million as of December 31, 2008 and 2007, and the fair value of the 8.5% Notes was approximately $280 million as of December 31, 2008 based on quoted market prices.

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    Expedia, Inc.

    Notes to Consolidated Financial Statements (Continued)

            The 7.456% and 8.5% Notes are senior unsecured obligations guaranteed by certain domestic Expedia subsidiaries and rank equally in right of payment with all of our existing and future unsecured and unsubordinated obligations. For further information, see Note 19—Guarantor and Non-Guarantor Supplemental Financial Information. Accrued interest related to the 7.456% and 8.5% Notes was $32 million as of December 31, 2008, and accrued interest related to the 7.456% Notes was $14 million as of December 31, 2007.

            The 7.456% and 8.5% Notes include covenants that limit our ability to (i) incur liens, (ii) enter into sale and leaseback transactions and (iii) merge, consolidate or sell substantially all of our assets.

      Credit Facility

            In July 2005, we entered into a $1 billion five-year unsecured revolving credit facility with a group of lenders, which is unconditionally guaranteed by certain Expedia subsidiaries and expires in August 2010. The $650 million carrying amount of the borrowing approximates its fair value as of December 31, 2008. The facility bears interest based on market interest rates plus a spread, which is determined based on our financial leverage. The interest rate was 1.34% as of December 31, 2008 and 5.70% as of December 31, 2007. The annual fee to maintain the facility ranged from 0.1% to 0.2% on the unused portion of the facility, or approximately $1 million to $2 million if all of the facility was unused. The facility also contained financial covenants consisting of a leverage ratio and a minimum tangible net worth requirement.

            The amount of stand-by letters of credit ("LOC") issued under the facility reduces the amount available to us. As of December 31, 2008 and 2007, there were $58 million and $52 million of outstanding stand-by LOCs issued under the facility.

            On February 18, 2009, we amended our credit facility to replace our tangible net worth covenant with a minimum interest coverage covenant, among other changes. As part of this amendment our leverage ratio was tightened, pricing on our borrowings increased by 200 basis points and we paid approximately $6 million in fees, which will be amortized over the remaining term of the credit facility.

    NOTE 7—Derivative Instruments

            The fair values of the derivative financial instruments generally represent the estimated amounts we would expect to receive or pay upon termination of the contracts as of the reporting date.

      Ask Jeeves Notes

            As a result of the Spin-Off, we assumed certain obligations of IAC related to IAC's Ask Jeeves Notes. When holders of the Ask Jeeves Notes convert their notes, they received shares of both IAC and Expedia common stock. Under the terms of the Spin-Off, we were obligated to issue shares of our common stock to IAC for delivery to the holders of the Ask Jeeves Notes, or pay cash in equal value, in lieu of issuing such shares, at our option. This obligation represented a derivative liability on our consolidated balance sheet because it was not indexed solely to shares of our common stock. We recorded the fair value of this derivative obligation on our consolidated balance sheets with any changes in fair value recorded in our consolidated statements of operations in Other, net. The estimated fair value of this liability fluctuated primarily based on changes in the price of our common stock.

            In 2008, the remainder of these notes converted and we released approximately 0.5 million shares of our common stock with a fair value of $11 million to satisfy the final conversion requirements. In

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    Expedia, Inc.

    Notes to Consolidated Financial Statements (Continued)


    2008, 2007 and 2006, we recognized net gains (losses) of $4 million, $(5) million and $8 million related to these Ask Jeeves Notes. As of June 1, 2008, we had no further obligations related to the Ask Jeeves Notes. As of December 31, 2007, the related derivative liability balance was $15 million and was included in accrued expenses and other current liabilities.

      Cross-Currency Swaps

            We entered into cross-currency swaps to hedge against the change in value of certain intercompany loans denominated in currencies other than the lending subsidiaries' functional currency.

            In November 2003, we entered into a swap with a notional amount of Euro 39 million that matures in October 2013. Under the terms of this swap, we paid euro at a rate of the three-month EURIBOR plus 0.50% on euro 39 million and we received 4.90% interest on $46 million in U.S. dollars.

            In April 2004, we entered into a swap with a notional amount of Euro 38 million that matures in April 2014. Under the terms of this swap, we paid euro at a rate of the six-month EURIBOR plus 0.90% on euro 38 million and we received 5.47% interest on $46 million in U.S. dollars.

            These swaps were designated as cash flow hedges and were re-measured at fair value each reporting period. The fair values of our cross-currency swaps were determined using Level 2 valuation techniques, as defined in SFAS 157, and were based on the present value of net future cash payments and receipts, which fluctuate based on changes in market interest rates and the euro/U.S. dollar exchange rate.

            During the third quarter of 2008, we terminated our cross-currency swap agreements for a cost of $17 million and concurrently capitalized the underlying intercompany loans. As a result of these transactions, we recognized a net gain of less than $1 million. At the time of termination, $13 million of cash collateral was held by the counterparty resulting in a net liability of $4 million that was unpaid as of December 31, 2008 and was classified in accrued expenses and other current liabilities. As of December 31, 2007, we had a $21 million cross-currency swap liability included in other long-term liabilities and a corresponding $21 million asset for cash collateral held by our counterparty included in long-term investments and other assets.

      Stock Warrants

            In connection with prior transactions, IAC assumed a number of stock warrants that were adjusted to become exercisable into IAC common stock and subsequent to the Spin-Off, also into our common stock. As of December 31, 2008, there are approximately 42,700 of these stock warrants outstanding with expiration dates through May 2010. Each stock warrant represents the right to receive the number of shares of IAC common stock and Expedia common stock that the stock warrant holder would have received had the holder exercised the stock warrant immediately prior to the Spin-Off. Under the terms of the Spin-Off between IAC and Expedia, we assumed the obligation to deliver our common stock to the stock warrant holders upon exercise and will receive a portion of the proceeds from exercise. This obligation represents a derivative instrument that we record at fair value on our consolidated balance sheets with any changes in value recorded in our consolidated statements of operations in Other, net. The estimated fair value of this liability fluctuates based on changes in the price of our common stock.

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    Expedia, Inc.

    Notes to Consolidated Financial Statements (Continued)

    NOTE 8—Employee Benefit Plans

            Our U.S. employees are generally eligible to participate in a retirement and savings plan that qualifies under Section 401(k) of the Internal Revenue Code. Participating employees may contribute up to 16% of their pretax salary, but not more than statutory limits. We contribute fifty cents for each dollar a participant contributes in this plan, with a maximum contribution of 3% of a participant's earnings. Our contribution vests with the employee after the employee completes two years of service. Participating employees have the option to invest in our common stock, but there is no requirement for participating employees to invest their contribution or our matching contribution in our common stock. We also have various defined contribution plans for our international employees. Our contributions to these benefit plans were $12 million, $9 million and $8 million for the years ended December 31, 2008, 2007 and 2006.

    NOTE 9—Stock-Based Awards and Other Equity Instruments

            Pursuant to the 2005 Expedia, Inc. Stock and Annual Incentive Plan, we may grant restricted stock, restricted stock awards, RSUs, stock options and other stock-based awards to directors, officers, employees and consultants. As of December 31, 2008, we had approximately 8 million shares of common stock reserved for new stock-based awards under the 2005 Stock and Annual Incentive Plan. We issue new shares to satisfy the exercise or release of stock-based awards.

            RSUs, which are stock awards that are granted to employees entitling the holder to shares of our common stock as the award vests, have been our primary form of stock-based award. We record RSUs that will settle in cash as a liability and we remeasure them to fair value at the end of each reporting period. These awards that settle in cash and the resulting liability are insignificant. Our RSUs generally vest over five years, but may accelerate in certain circumstances, including certain changes in control.

            The following table presents a summary of RSU activity:

     
    		 RSU's Weighted Average
    Grant-Date
    Fair Value    		 
     
    		 (In thousands)
    		 

    Balance as of January 1, 2006

    		  5,765 $24.08 

    Granted

    		  5,016  18.59 

    Vested and released

    		  (1,337) 23.94 

    Cancelled

    		  (1,923) 23.09 
           

    Balance as of December 31, 2006

    		  7,521  20.72 

    Granted

    		  3,768  22.92 

    Vested and released

    		  (1,538) 21.72 

    Cancelled

    		  (1,489) 21.20 
           

    Balance as of December 31, 2007

    		  8,262  21.43 

    Granted

    		  4,123  21.78 

    Vested and released

    		  (1,846) 21.76 

    Cancelled

    		  (1,493) 22.20 
           

    Balance as of December 31, 2008

    		  9,046  21.41 
           

            The total fair value of shares vested and released during the years ended December 31, 2008, 2007 and 2006 was $40 million, $33 million and $32 million. Included in RSUs outstanding at December 31,

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    Expedia, Inc.

    Notes to Consolidated Financial Statements (Continued)


    2008 are approximately 1 million RSUs awarded to certain senior executives, for which vesting is tied to achievement of performance targets.

            We have fully vested stock warrants with expiration dates through May 2012 outstanding, certain of which were traded on the NASDAQ under the symbols "EXPEW" and "EXPEZ" until their expiration on February 4, 2009. Each stock warrant is exercisable for a certain number of shares of our common stock or a fraction thereof.

            The following table presents a summary of our stock warrants (equivalent shares) from December 31, 2007 through December 31, 2008:

    Expiration Date
    		 Weighted
    Average
    Exercise
    Price    		 Outstanding
    Warrants at
    December 31,
    2007    		 Exercised Cancelled Outstanding
    Warrants at
    December 31,
    2008    		 
     
    		 (In thousands, except per warrant data)
    		 

    May 2012

    		 $25.56  16,094  —  —  16,094 

    February 2009

    		  31.22  7,295  —  —  7,295 

    February 2009

    		  11.93  11,085  (5) —  11,080 

    November 2009 to May 2010

    		  13.23  163  —  —  163 
                 

    		     34,637  (5) —  34,632 
                 

            The following table presents a summary of our stock option activity:

     
    		 Options Weighted
    Average
    Exercise Price    		 Remaining
    Contractual Life    		 Aggregate
    Intrinsic Value    		 
     
    		 (In thousands)
    		  
    		 (In years)
    		 (In thousands)
    		 

    Balance as of January 1, 2006

    		  27,706 $15.71       

    Exercised

    		  (3,657) 9.41       

    Cancelled

    		  (916) 20.38       
                 

    Balance as of December 31, 2006

    		  23,133  16.52       

    Exercised

    		  (13,242) 10.30       

    Cancelled

    		  (216) 29.61       
                 

    Balance as of December 31, 2007

    		  9,675  24.74       

    Granted

    		  1,275  8.14       

    Exercised

    		  (618) 10.14       

    Cancelled

    		  (498) 29.14       
                 

    Balance as of December 31, 2008

    		  9,834  23.29  4.8 $1,273 
                 

    Exercisable as of December 31, 2008

    		  4,759  20.29  2.2  858 
                 

    Vested and expected to vest after December 31, 2008

    		  9,427  23.94  4.6  1,136 
                 

            During 2008, we also granted stock options to certain key employees. The fair value of stock options granted during the year ended December 31, 2008 was estimated at the date of grant using the

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    Expedia, Inc.

    Notes to Consolidated Financial Statements (Continued)


    Black-Scholes option pricing model, assuming no dividends and the following weighted average assumptions:

    Risk-free interest rate

    		  2.18%

    Expected volatility

    		  45.63%

    Expected life (in years)

    		  4.54 

    Weighted-average estimated fair value of options granted during the year

    		 $3.38 

            The aggregate intrinsic value of outstanding options shown in the table above represents the total pretax intrinsic value at December 31, 2008, based on our closing stock price of $8.24 as of the last trading date. The total intrinsic value of stock options exercised was $7 million, $299 million and $35 million for the years ended December 31, 2008, 2007 and 2006.

            The following table presents a summary of our stock options outstanding and exercisable at December 31, 2008:

     
    		  
    		 Options Outstanding Options Exercisable 
    Range of Exercise Prices Shares Weighted-
    Average
    Price Per Share    		 Remaining
    Contractual
    Life    		 Shares Weighted-
    Average
    Exercise Price    		 
     
    		 (In thousands)
    		  
    		 (In years)
    		 (In thousands)
    		  
    		 
    $  0.01 - $  5.00  184 $3.77  3.8  184 $3.77 
        5.01 -     8.00  668  7.58  9.7  18  6.25 
        8.01 -   12.00  947  9.06  7.1  322  9.80 
      12.01 -   18.00  911  14.76  3.1  911  14.76 
      18.01 -   25.00  2,691  21.40  1.7  2,691  21.40 
      25.01 -   35.00  2,768  28.39  6.1  368  27.77 
      35.01 -   45.00  1,632  38.34  5.7  232  38.28 
      45.01 -   97.00  33  73.49  1.0  33  73.49 
                   
        0.01 -   97.00  9,834  23.29  4.8  4,759  20.29 
                   

            In 2008, 2007 and 2006, we recognized stock-based compensation expense of $61 million, $63 million and $80 million. The total income tax benefit related to stock-based compensation expense was $21 million, $22 million and $27 million for 2008, 2007 and 2006.

            Cash received from stock-based award exercises for the years ended December 31, 2008 and 2007 was $6 million and $55 million. Our employees that held IAC vested stock options prior to the Spin-Off received vested stock options in both Expedia and IAC. As these stock options are exercised, we receive a tax deduction. Total current income tax benefits during the years ended December 31, 2008 and 2007 associated with the exercise of IAC and Expedia stock-based awards held by our employees were $19 million and $121 million, of which we recorded approximately $2 million and $9 million as a reduction of goodwill.

            In the fourth quarter of 2007, our Chairman and Senior Executive exercised options to purchase 9.5 million shares. 2.3 million shares were withheld and concurrently cancelled by the Company to cover the exercise price of $8.59 per share and 3.5 million shares were withheld and concurrently cancelled to cover tax obligations, with a net delivery of 3.7 million shares.

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    Expedia, Inc.

    Notes to Consolidated Financial Statements (Continued)

            As of December 31, 2008, there was approximately $131 million of unrecognized stock-based compensation expense, net of estimated forfeitures, related to unvested stock-based awards, which is expected to be recognized in expense over a weighted-average period of 3.21 years.

    NOTE 10—Income Taxes

            The following table presents a summary of our U.S. and foreign income (loss) before income taxes and minority interest:

     
    		 Year Ended December 31, 
     
    		 2008 2007 2006 
     
    		 (In thousands)
    		 

    U.S. 

    		 $(2,442,297)$500,624 $388,588 

    Foreign

    		  (72,407) (3,640) (3,690)
            

    Total

    		 $(2,514,704)$496,984 $384,898 
            

            The following table presents a summary of our income tax expense components:

     
    		 Year Ended December 31, 
     
    		 2008 2007 2006 
     
    		 (In thousands)
    		 

    Current income tax expense:

    		          
     

    Federal

    		 $196,072 $182,960 $144,194 
     

    State

    		  16,029  16,837  4,581 
     

    Foreign

    		  2,907  4,900  1,328 
            

    Current income tax expense

    		  215,008  204,697  150,103 

    Deferred income tax (benefit) expense:

    		          
     

    Federal

    		  (188,901) (8,041) (8,803)
     

    State

    		  (7,841) 7,062  (1,572)
     

    Foreign

    		  (12,300) (604) (277)
            

    Deferred income tax benefit:

    		  (209,042) (1,583) (10,652)
            

    Income tax expense

    		 $5,966 $203,114 $139,451 
            

            For all periods presented, we have computed current and deferred tax expense using our stand-alone effective tax rate. As of December 31, 2008, our current income tax payable represents amounts that we will pay to the Internal Revenue Service ("IRS") and other tax authorities based on our taxable income.

            We reduced our current income tax payable by $19 million, $121 million and $34 million for the years ended December 31, 2008, 2007 and 2006, for tax deductions attributable to stock-based compensation. For 2008, 2007 and 2006, we recorded $2 million, $9 million and $17 million of the related income tax benefits of this stock-based compensation as a reduction of goodwill.

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    Expedia, Inc.

    Notes to Consolidated Financial Statements (Continued)

            The tax effect of cumulative temporary differences and net operating losses that give rise to our deferred tax assets and deferred tax liabilities as of December 31, 2008 and 2007 are as follows:

     
    		 December 31, 
     
    		 2008 2007 
     
    		 (In thousands)
    		 

    Deferred tax assets:

    		       

    Provision for accrued expenses

    		 $26,395 $23,705 

    Deferred revenue

    		  16,646  3,041 

    Net operating loss and tax credit carryforwards

    		  31,536  23,856 

    Capitalized R&D expenditures

    		  10,779  14,834 

    Stock-based compensation

    		  48,110  45,269 

    Investment impairment

    		  8,586  8,556 

    Other

    		  10,360  10,590 
          

    Total deferred tax assets

    		  152,412  129,851 

    Less valuation allowance

    		  (32,085) (27,911)
          

    Net deferred tax assets

    		 $120,327 $101,940 
          

    Deferred tax liabilities:

    		       

    Prepaid merchant bookings and prepaid expenses

    		 $(44,647)$(39,825)

    Intangible assets

    		  (220,379) (375,069)

    Investment in subsidiaries

    		  (10,449) (10,823)

    Unrealized gains

    		  (12,946) (18,719)

    Property and equipment

    		  (25,848) (20,951)

    Other

    		  —  (53)
          

    Total deferred tax liabilities

    		 $(314,269)$(465,440)
          

    Net deferred tax liability

    		 $(193,942)$(363,500)
          

            At December 31, 2008, we had federal, state and foreign net operating loss carryforwards ("NOLs") of approximately $10 million, $53 million and $70 million. If not utilized, the federal and state NOLs will expire at various times between 2009 and 2028, $65 million foreign NOLs can be carried forward indefinitely, and $5 million foreign NOLs will expire at various times between 2009 and 2028.

            At December 31, 2008, we had a valuation allowance of approximately $32 million related to the portion of net operating loss carryforwards and other items for which it is more likely than not that the tax benefit will not be realized. This amount represented an increase of approximately $4 million over the amount recorded as of December 31, 2007 and was primarily attributable to an increase in foreign operating losses.

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    Expedia, Inc.

    Notes to Consolidated Financial Statements (Continued)

            A reconciliation of total income tax expense to the amounts computed by applying the statutory federal income tax rate to income before income taxes and minority interest is as follows:

     
    		 Year Ended December 31, 
     
    		 2008 2007 2006 
     
    		 (In thousands)
    		 

    Income tax (benefit) expense at the federal statutory rate of 35%

    		 $(880,146)$173,944 $134,714 

    Non-deductible goodwill impairment

    		  855,550  —  — 

    State income taxes, net of effect of federal tax benefit

    		  11,317  9,844  4,813 

    Unrecognized tax benefits and related interest

    		  12,525  4,211  — 

    Other, net

    		  6,720  15,115  (76)
            

    Income tax expense

    		 $5,966 $203,114 $139,451 
            

            By virtue of the previously filed separate company and consolidated income tax returns filed with IAC, we are routinely under audit by federal, state, local and foreign authorities. These audits include questioning the timing and the amount of income and deductions and the allocation of income among various tax jurisdictions. Annual tax provisions include amounts considered sufficient to pay assessments that may result from the examination of prior year returns. We are no longer subject to tax examinations by tax authorities for years prior to 1998.

            On January 1, 2007, we adopted FIN 48,Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109. A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows, in thousands:

    Balance at January 1, 2007

    		 $63,710 

    Increases to tax positions related to the current year

    		  104,231 

    Interest and penalties

    		  5,652 
        

    Balance at December 31, 2007

    		  173,593 

    Increases to tax positions related to the current year

    		  15,883 

    Decreases to tax positions related to the prior year

    		  (22,520)

    Audit settlements paid during 2008

    		  (4,911)

    Interest and penalties

    		  17,794 
        

    Balance at December 31, 2008(1)

    		 $179,839 
        
        (1)
        As of December 31, 2008, we had $180 million of unrecognized tax benefits, of which $190 million is classified as long-term and included in Other long-term liabilities.

            Included in the balance at December 31, 2008 and 2007 were $68 million and $17 million of liabilities for uncertain tax positions that, if recognized, would decrease our provision for income taxes. Also included in the balance at December 31, 2008 were $122 million, of which $3 million and $95 million was added in 2008 and 2007, of excess tax benefits that resulted from our Chairman and Senior Executive's exercises of stock options during 2007 and 2005. If the IRS were to make a final determination that IAC and not Expedia were entitled to such deductions, then under the terms of our tax sharing agreement, IAC would pay to Expedia an amount equal to any such tax benefit at such time as it were actually realized by IAC. Therefore, an unfavorable outcome related to this position would not materially impact our cash flows.

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    Expedia, Inc.

    Notes to Consolidated Financial Statements (Continued)

            We recognize interest and penalties related to our liabilities for uncertain tax positions in income tax expense. As of December 31, 2008 and 2007, we had approximately $24 million and $11 million accrued for the potential payment of estimated interest and penalties. During the years ended December 31, 2008, 2007 and 2006, we recognized approximately $12 million, $4 million and $2 million of interest, net of federal benefit and penalties, related to our liabilities for uncertain tax positions.

    NOTE 11—Stockholders' Equity

      Common Stock and Class B Common Stock

            Our authorized common stock consists of 1.6 billion shares of common stock with par value of $0.001 per share, and 400 million shares of Class B common stock with par value of $0.001 per share. Both classes of common stock qualify for and would share equally in dividends, if declared by our Board of Directors, and generally vote together on all matters. Common stock is entitled to one vote per share and Class B common stock is entitled to 10 votes per share. Holders of common stock, voting as a single, separate class are entitled to elect 25% of the total number of directors. Class B common stockholders may, at any time, convert their shares into common stock, on a one for one share basis. Upon conversion, the Class B common stock is retired and is not available for reissue. In the event of liquidation, dissolution, distribution of assets or winding-up of Expedia, Inc., the holders of both classes of common stock have equal rights to receive all the assets of Expedia, Inc. after the rights of the holders of the preferred stock have been satisfied.

      Preferred Stock

            Our preferred stock has a face value of $22.23 per share; each share is entitled to an annual dividend of 1.99%. Each preferred stockholder is entitled to two votes per share. Preferred stockholders may, at certain times through 2017, elect to have their shares redeemed or elect to convert their shares into common stock based upon formulas described in the related Certificate of Designations of Series A Cumulative Convertible Preferred Stock of Expedia, Inc. Beginning February 4, 2012, we may redeem the preferred stock for cash or common stock. On February 4, 2022, all outstanding shares of preferred stock automatically convert into common stock.

      Share Repurchases

            During 2007, we completed two tender offers pursuant to which we acquired 30 million tendered shares of our common stock at a purchase price of $22.00 per share and 25 million tendered shares of our common stock at $29.00 per share, for a total cost of $1.4 billion plus fees and expenses relating to the tender offers.

            During 2006, we completed the repurchase of 20 million shares of our common stock for a total cost of $288 million, representing an average price of $14.42 per share including transaction costs. All shares were repurchased in the open market at prevailing market prices.

            In addition, during 2006 our Board of Directors authorized share repurchases of up to 20 million outstanding shares of our common stock. As of February 13, 2009, we had not made any share repurchases under this specific authorization. There is no fixed termination date for the repurchase. The amount of repurchases we may make under this authorization are subject to certain of our debt covenants.

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    Expedia, Inc.

    Notes to Consolidated Financial Statements (Continued)

      Accumulated Other Comprehensive Income (Loss)

            The following table presents the components of accumulated other comprehensive income (loss), net of tax:

     
    		 December 31, 
     
    		 2008 2007 
     
    		 (In thousands)
    		 

    Accumulated unrealized gains (losses) on derivatives

    		 $— $339 

    Accumulated foreign currency translation adjustments

    		  (4,662) 31,426 
          
     

    Total Accumulated Other Comprehensive Income (Loss)

    		 $(4,662)$31,765 
          

      Other Comprehensive Income (Loss)

            The following table presents the changes in the components of other comprehensive income (loss), net of tax:

     
    		 For the Year Ended December 31, 
     
    		 2008 2007 2006 
     
    		 (In thousands)
    		 

    Net Income (Loss)

    		 $(2,517,763)$295,864 $244,934 

    Other Comprehensive Income (Loss)

    		          
     

    Currency translation adjustments

    		  (36,088) 16,768  14,696 
     

    Unrealized gains (losses) on derivatives, net of taxes:

    		          
      

    Unrealized holding gains (losses), net of tax effect of $(2,058) in 2008, $2,078 in 2007 and $4,300 in 2006

    		  3,614  (5,545) (7,832)
      

    Less: reclassification adjustment for net (gains) losses recognized during the period, net of tax effect of $2,255 in 2008, $(3,210) in 2007 and $(3,691) in 2006

    		  (3,953) 8,563  6,713 
            
      

    Other comprehensive income (loss)

    		  (36,427) 19,786  13,577 
            
       

    Total Comprehensive Income (Loss)

    		 $(2,554,190)$315,650 $258,511 
            

    NOTE 12—Earnings Per Share

      Basic Earnings Per Share

            Basic earnings per share was calculated for the years ended December 31, 2008, 2007 and 2006 using the weighted average number of common and Class B common shares outstanding during the period excluding restricted stock and stock held in escrow. As of December 31, 2008 and 2007, we had 751 shares of preferred stock outstanding, the impact of which on our earnings per share calculation is immaterial.

      Diluted Earnings Per Share

            For the years ended December 31, 2008, 2007 and 2006, we computed diluted earnings per share using (i) the number of shares of common stock and Class B common stock used in the basic earnings per share calculation as indicated above (ii) if dilutive, the incremental common stock that we would issue upon the assumed exercise of stock options and stock warrants and the vesting of restricted stock

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    Expedia, Inc.

    Notes to Consolidated Financial Statements (Continued)

    units using the treasury stock method, and (iii) the shares we were contractually obligated to issue associated with the Ask Jeeves Notes, if converted, and other stock-based commitments.

            The following table presents our basic and diluted net income (loss) per share:

     
    		 Year Ended December 31, 
     
    		 2008 2007 2006 
     
    		 (In thousands, except per share data)
    		 

    Net income (loss)

    		 $(2,517,763)$295,864 $244,934 

    Net income (loss) per share available to common stockholders:

    		          

    Basic

    		 $(8.80)$1.00 $0.72 

    Diluted

    		  (8.63) 0.94  0.70 

    Weighted average number of shares outstanding:

    		          

    Basic

    		  286,167  296,640  338,047 

    Dilutive effect of:

    		          
     

    Options to purchase common stock

    		  904  7,384  7,744 
     

    Warrants to purchase common stock

    		  3,698  7,574  3,600 
     

    Other dilutive securities

    		  1,061  2,635  2,790 
            

    Diluted

    		  291,830  314,233  352,181 
            

            The earnings per share amounts are the same for common stock and Class B common stock because the holders of each class are legally entitled to equal per share distributions whether through dividends or in liquidation.

    NOTE 13—Other Income (Expense)

      Other, net

    ��       The following table presents the components of Other, net:

     
    		 For the Year Ended December 31, 
     
    		 2008 2007 2006 
     
    		 (In thousands)
    		 

    Foreign exchange rate gains (losses), net

    		 $(47,129)$(22,047)$10,367 

    Equity gain (loss) of unconsolidated affiliates

    		  (979) (2,614) 2,541 

    Gain (loss) on derivative instruments assumed at Spin-Off

    		  4,600  (5,748) 8,137 

    Federal excise tax refunds

    		  —  12,058  — 

    Other

    		  (670) (256) (2,275)
            
     

    Total

    		 $(44,178)$(18,607)$18,770 
            

            In 2008, in connection with the closing of an acquisition and the related holding of euros to economically hedge the purchase price, we recognized a net loss of $21 million, included in foreign exchange rate gains (losses), net.

            In 2007, we recorded refunds based on notification from the IRS totaling $15 million related to Federal Excise Tax ("FET") taxes remitted to the IRS but not collected from customers for airline ticket sales by one of our subsidiaries in the third quarter of 2001 through the third quarter of 2004, plus accrued interest thereon. We recorded $3 million to revenue as that amount relates to taxes remitted on airline ticket sales subsequent to our acquisition of the subsidiary. We recorded $12 million

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    Expedia, Inc.

    Notes to Consolidated Financial Statements (Continued)


    to Other, net for taxes remitted on airline ticket sales prior to the acquisition and total interest earned on all underlying tax remittances.

    NOTE 14—Commitments and Contingencies

      Letters of Credit, Purchase Obligations and Guarantees

            We have commitments and obligations that include purchase obligations, guarantees and LOCs, which could potentially require our payment in the event of demands by third parties or contingent events. The following table presents these commitments and obligations as of December 31, 2008:

     
    		  
    		 By Period 
     
    		 Total Less than
    1 Year    		 1 to 3 Years 3 to 5 Years More than
    5 Years    		 
     
    		 (In thousands)
    		 

    Purchase obligations

    		 $32,293 $22,101 $10,192 $— $— 

    Guarantees

    		  39,079  39,079  —  —  — 

    Letters of credit

    		  58,226  57,045  1,181  —  — 
                

    		 $129,598 $118,225 $11,373 $— $— 
                

            Our purchase obligations represent the minimum obligations we have under agreements with certain of our vendors. These minimum obligations are less than our projected use for those periods. Payments may be more than the minimum obligations based on actual use.

            We have guarantees primarily related to a specific country aviation authority for the potential non-delivery, by us, of packaged travel sold in that country. The authority also requires that a portion of the total amount of packaged travel sold be bonded.

            Our LOCs consist of stand-by LOCs, underwritten by a group of lenders, which we primarily issue to certain hotel properties to secure our payment for hotel room transactions. The contractual expiration dates of these LOCs are shown in the table above. There were no claims made against any stand-by LOCs during the years ended December 31, 2008, 2007 and 2006.

      Lease Commitments

            We have contractual obligations in the form of operating leases for office space and related office equipment for which we record the related expense on a monthly basis. Certain leases contain periodic rent escalation adjustments and renewal options. Rent expense related to such leases is recorded on a straight-line basis. Operating lease obligations expire at various dates with the latest maturity in 2018. For the years ended December 31, 2008, 2007 and 2006, we recorded rental expense of $49 million, $33 million and $30 million.

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    Expedia, Inc.

    Notes to Consolidated Financial Statements (Continued)

            The following table presents our estimated future minimum rental payments under operating leases with noncancelable lease terms that expire after December 31, 2008, in thousands:

    Year Ending December 31,
    		  
    		 

    2009

    		 $39,097 

    2010

    		  36,984 

    2011

    		  35,205 

    2012

    		  33,626 

    2013

    		  27,539 

    2014 and thereafter

    		  93,404 
        

    		 $265,855 
        

      Legal Proceedings

            In the ordinary course of business, we are a party to various lawsuits. In the opinion of management, we do not expect these lawsuits to have a material impact on the liquidity, results of operations, or financial condition of Expedia. We also evaluate other potential contingent matters, including value-added tax, federal excise tax, transient occupancy or accommodation tax and similar matters. We do not believe that the aggregate amount of liability that could be reasonably possible with respect to these matters would have a material adverse effect on our financial results.

            Securities Related Class Action Litigations.    While we are not a party to the securities litigation filed against IAC, under the terms of our separation agreement with IAC, we have generally agreed to bear a portion of the costs and liabilities, if any, associated with any securities law litigation relating to conduct prior to the Spin-Off of the businesses or entities that comprise Expedia following the Spin-Off. This case arises out of IAC's August 4, 2004, announcement of its earnings for the second quarter of 2004.

            Litigation relating to the IAC/hotels.com merger agreement announced April 10, 2003, is pending in Delaware. The principal claim in these actions is that the defendants breached their fiduciary duty to the plaintiffs by entering into or approving the merger agreement.

            Litigation Relating to Hotel Occupancy Taxes.    Lawsuits have been filed by forty-four cities and counties involving hotel occupancy taxes. In addition, there have been six consumer lawsuits filed relating to taxes and fees. The municipality and consumer lawsuits are in various stages ranging from responding to the complaint to discovery. We continue to defend these lawsuits vigorously. To date, fifteen of the municipality lawsuits have been dismissed. Most of these dismissals have been without prejudice and, generally, allow the municipality to seek administrative remedies prior to pursuing further litigation. Five dismissals (Pitt County, North Carolina; Findlay, Ohio; Columbus and Dayton, Ohio; City of Orange, Texas; and Louisville, Kentucky) were based on a finding that the defendants were not subject to the local hotel occupancy tax ordinance. As a result of this litigation and other attempts by certain jurisdictions to levy such taxes, we have established a reserve for the potential settlement of issues related to hotel occupancy taxes in the amount of $20 million and $19 million at December 31, 2008 and 2007, respectively. Our reserve is based on our best estimate and the ultimate resolution of these issues may be greater or less than the liabilities recorded.

            In connection with various occupancy tax audits and assessments, certain jurisdictions require that tax payers pay any assessed taxes prior to being allowed to contest or litigate the applicability of the

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    Expedia, Inc.

    Notes to Consolidated Financial Statements (Continued)

    ordinances, which is referred to as "pay to play." We have been assessed approximately $8.2 million in taxes, plus $9.5 million in penalties and interest by the city of Anaheim, which has a "pay to play" tax ordinance. To preserve our right to contest this assessment, it is possible that we may be required to make a payment to Anaheim, as well as to other California jurisdictions that make similar assessments. We are challenging the city's purported right to require us to pay the tax assessment prior to commencing litigation. Other jurisdictions may also attempt to require that we pay any assessed taxes prior to being allowed to contest or litigate the applicability of similar tax ordinances. Payment of these amounts is not an admission that we believe we are subject to such taxes and we intend to continue defending our position vigorously.

    NOTE 15—Related Party Transactions

            In connection with the Spin-Off, we entered into various agreements with IAC, a related party due to common ownership, to provide for an orderly transition and to govern our ongoing relationships with IAC. These agreements include, among others, a separation agreement, a tax sharing agreement, an employee matters agreement and a transition services agreement.

            In addition, in conjunction with the Spin-Off, we entered into a joint ownership and cost sharing agreement with IAC, under which IAC transferred to us 50% ownership in an airplane, which is available for use by both companies. We share equally in capital costs; operating costs are pro-rated based on actual usage. In May 2006, the airplane was placed in service and is being depreciated over 10 years. As of December 31, 2008 and 2007, the net basis in our ownership interest was $18 million and $19 million recorded in Long-term investments and other assets. In 2008 and 2007, operating and maintenance costs paid directly to the jointly-owned subsidiary for the airplane were $400,000 for both periods.

            On August 20, 2008, IAC completed its plan to separate into five publicly traded companies. With this separation, we expect our related party transactions with the newly constituted IAC to be immaterial on a go-forward basis. In 2008, we paid $4 million to IAC businesses. In 2007, we received $100,000 from IAC businesses, and paid $8 million to IAC businesses. In 2006, we received $2 million from IAC businesses, and paid $31 million to IAC businesses.

            In the fourth quarter of 2006, eLong sold one of its businesses to a subsidiary of IAC for approximately $15 million.

    NOTE 16—Segment Information

            We have two reportable segments: North America and Europe. We determined our segments based on how our chief operating decision makers manage our business, make operating decisions and evaluate operating performance. Our primary operating metric for evaluating segment performance is "Operating Income Before Amortization" (OIBA as defined below), which includes allocations of certain expenses, primarily cost of revenue and facilities, to the segments. We base the allocations primarily on transaction volumes and other usage metrics; this methodology is periodically evaluated and may change. We do not allocate certain shared expenses such as partner services, product development, accounting, human resources and legal to our reportable segments. We include these expenses in Corporate and Other.

            Our North America segment provides a full range of travel and/or advertising services to customers primarily located in the United States, Canada and Mexico. This segment operates through a variety of brands including Classic Vacations, Expedia.com, hotels.com, Hotwire.com and the

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    Expedia, Inc.

    Notes to Consolidated Financial Statements (Continued)

    TripAdvisor Media Network. Our Europe segment provides travel services primarily through localized Expedia websites in Austria, Belgium, Denmark, France, Germany, Ireland, Italy, the Netherlands, Norway, Spain, Sweden and the United Kingdom, as well as localized versions of hotels.com in various European countries. In addition, Venere is included within our Europe segment from its acquisition date in the third quarter of 2008 forward.

            Corporate and Other includes Egencia, Expedia Asia Pacific and unallocated corporate functions and expenses. Egencia provides travel products and services to corporate customers in North America, Europe and the Asia Pacific region. Expedia Asia Pacific provides online travel information and reservation services primarily through eLong in China, localized Expedia websites in Australia, India, Japan and New Zealand, as well as localized versions of hotels.com in various Asian countries. In addition, we record amortization of intangible assets, any impairment charges and stock-based compensation expense in Corporate and Other.

            We are in the process of reorganizing our business around our global brands. Our chief operating decision makers are assessing our new structure to determine how we will manage our business and report our financial results. Beginning in the first quarter of 2009, we expect our reportable segments to change as we will no longer manage the business on a geographical basis.

            The following table presents our segment information for the years ended December 31, 2008, 2007 and 2006. As a significant portion of our property and equipment is not allocated to our operating segments, we do not report the assets or related depreciation expense as it would not be meaningful, nor do we regularly provide such information to our chief operating decision makers.

     
    		 Year Ended December 31, 2008 
     
    		 North America Europe Corporate
    and Other    		 Total 
     
    		 (In thousands)
    		 

    Revenue

    		 $2,047,807 $689,978 $199,228 $2,937,013 
              

    Operating Income Before Amortization (Unaudited)

    		 $898,949 $215,772 $(416,947)$697,774 

    Amortization of intangible assets

    		  —  —  (69,436) (69,436)

    Impairment of goodwill

    		  —  —  (2,762,100) (2,762,100)

    Impairment of intangible and other long-lived assets

    		  —  —  (233,900) (233,900)

    Stock-based compensation

    		  —  —  (61,291) (61,291)
              

    Operating income (loss)

    		 $898,949 $215,772 $(3,543,674)$(2,428,953)
              


     
    		 Year Ended December 31, 2007 
     
    		 North America Europe Corporate
    and Other    		 Total 
     
    		 (In thousands)
    		 

    Revenue

    		 $1,897,995 $606,997 $160,340 $2,665,332 
              

    Operating Income Before Amortization (Unaudited)

    		 $821,144 $207,747 $(359,404)$669,487 

    Amortization of intangible assets

    		  —  —  (77,569) (77,569)

    Stock-based compensation

    		  —  —  (62,849) (62,849)
              

    Operating income (loss)

    		 $821,144 $207,747 $(499,822)$529,069 
              

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    Expedia, Inc.

    Notes to Consolidated Financial Statements (Continued)


     
    		 Year Ended December 31, 2006 
     
    		 North America Europe Corporate
    and Other    		 Total 
     
    		 (In thousands)
    		 

    Revenue

    		 $1,666,804 $452,012 $118,770 $2,237,586 
              

    Operating Income Before Amortization (Unaudited)

    		 $735,458 $157,945 $(294,385)$599,018 

    Amortization of intangible assets

    		  —  —  (110,766) (110,766)

    Impairment of intangible and other long-lived assets

    		  —  —  (47,000) (47,000)

    Stock-based compensation

    		  —  —  (80,285) (80,285)

    Amortization of non-cash distribution and marketing

    		  (9,638) —  —  (9,638)
              

    Operating income (loss)

    		 $725,820 $157,945 $(532,436)$351,329 
              

      Definition of Operating Income Before Amortization

            We provide OIBA as a supplemental measure to GAAP operating income (loss) and net income (loss). We define OIBA as operating income (loss) plus: (1) stock-based compensation expense, (2) amortization of intangible assets and goodwill and intangible asset impairment, if applicable, (3) amortization of non-cash distribution and marketing expense and (4) certain one-time items, if applicable.

            OIBA is the primary operating metric used by which management evaluates the performance of our business, on which internal budgets are based, and by which management is compensated. Management believes that investors should have access to the same set of tools that management uses to analyze our results. This non-GAAP measure should be considered in addition to results prepared in accordance with GAAP, but should not be considered a substitute for, or superior to, GAAP. We endeavor to compensate for the limitation of the non-GAAP measure presented by also providing the comparable GAAP measure, GAAP financial statements, and descriptions of the reconciling items and adjustments, to derive the non-GAAP measure. We present a reconciliation of this non-GAAP financial measure to GAAP below.

            OIBA represents the combined operating results of Expedia, Inc.'s businesses, taking into account depreciation of property and equipment (including internal-use software and website development), which we believe is an ongoing cost of doing business, but excluding the effects of other non-cash expenses that may not be indicative of our core business operations. We believe this performance measure is useful to investors for the following reasons:

      •
      It corresponds more closely to the cash operating income generated from our core operations by excluding significant non-cash operating expenses; and

      •
      It provides greater insight into management decision making at Expedia, as OIBA is our primary internal metric for evaluating the performance of our business.

            OIBA has certain limitations in that it does not take into account the impact of certain expenses to our consolidated statements of operations, including stock-based compensation, non-cash payments to partners, acquisition-related accounting and certain one-time items, if applicable.

    IV-87

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    Expedia, Inc.

    Notes to Consolidated Financial Statements (Continued)

      Reconciliation of OIBA to Operating Income (Loss) and Net Income (Loss)

            The following table presents a reconciliation of OIBA to operating income (loss) and net income (loss) for the years ended December 31, 2008, 2007 and 2006:

     
    		 Year Ended December 31, 
     
    		 2008 2007 2006 
     
    		 (In thousands)
    		 

    OIBA (Unaudited)

    		 $697,774 $669,487 $599,018 

    Amortization of intangible assets

    		  (69,436) (77,569) (110,766)

    Impairment of goodwill

    		  (2,762,100) —  — 

    Impairment of intangible and other long-lived assets

    		  (233,900) —  (47,000)

    Stock-based compensation

    		  (61,291) (62,849) (80,285)

    Amortization of non-cash distribution and marketing

    		  —  —  (9,638)
            

    Operating income (loss)

    		  (2,428,953) 529,069  351,329 

    Interest income (expense), net

    		  (41,573) (13,478) 14,799 

    Other, net

    		  (44,178) (18,607) 18,770 

    Provision for income taxes

    		  (5,966) (203,114) (139,451)

    Minority interest in (income) loss of consolidated subsidiaries, net

    		  2,907  1,994  (513)
            

    Net income (loss)

    		 $(2,517,763)$295,864 $244,934 
            

      Geographic Information

            The following table presents revenue by geographic area, the United States and all other countries, for the years ended December 31, 2008, 2007 and 2006:

     
    		 Year Ended December 31, 
     
    		 2008 2007 2006 
     
    		 (In thousands)
    		 

    Revenue

    		          
     

    United States

    		 $1,923,452 $1,806,479 $1,610,018 
     

    All other countries

    		  1,013,561  858,853  627,568 
            

    		 $2,937,013 $2,665,332 $2,237,586 
            

            The following table presents property and equipment, net for the United States and all other countries, as of December 31, 2008 and 2007:

     
    		 As of December 31, 
     
    		 2008 2007 
     
    		 (In thousands)
    		 

    Property and equipment, net

    		       
     

    United States

    		 $219,543 $158,574 
     

    All other countries

    		  28,411  20,916 
          

    		 $247,954 $179,490 
          

    IV-88

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    Expedia, Inc.

    Notes to Consolidated Financial Statements (Continued)

    NOTE 17—Valuation and Qualifying Accounts

            The following table presents the changes in our valuation and qualifying accounts.

    Description
    		 Balance of
    Beginning of
    Period    		 Charges to
    Earnings    		 Charges to
    Other
    Accounts    		 Deductions Balance at
    End of
    Period    		 
     
    		 (In thousands)
    		 

    2008

    		                

    Allowance for doubtful accounts

    		 $6,081 $6,121 $1,974 $(1,592)$12,584 

    Other reserves

    		  6,300           5,842 

    2007

    		                

    Allowance for doubtful accounts

    		 $4,874 $4,289 $395 $(3,477)$6,081 

    Other reserves

    		  6,046           6,300 

    2006

    		                

    Allowance for doubtful accounts

    		 $3,914 $2,747 $200 $(1,987)$4,874 

    Other reserves

    		  5,125           6,046 

    NOTE 18—Quarterly Financial Information (Unaudited)

     
    		 Three Months Ended 
     
    		 March 31 June 30 September 30 December 31 
     
    		 (In thousands, except per share data)
    		 

    Year ended December 31, 2008

    		             

    Revenue

    		 $687,817 $795,048 $833,337 $620,811 

    Gross profit

    		  535,874  626,174  656,336  483,885 

    Operating income (loss)(1)

    		  89,998  170,541  199,586  (2,889,078)

    Net income (loss)(1)

    		  51,306  96,089  94,824  (2,759,982)

    Basic earnings per share(2)

    		 $0.18 $0.34 $0.33 $(9.62)

    Diluted earnings per share(2)

    		  0.17  0.33  0.33  (9.60)

    Year ended December 31, 2007

    		             

    Revenue

    		 $550,511 $689,923 $759,596 $665,302 

    Gross profit

    		  429,213  546,277  608,543  518,898 

    Operating income

    		  67,334  153,625  179,772  128,338 

    Net income

    		  34,776  96,136  99,595  65,357 

    Basic earnings per share(2)

    		 $0.11 $0.32 $0.34 $0.23 

    Diluted earnings per share(2)

    		  0.11  0.30  0.32  0.22 
    (1)
    Included as part of operating loss and net loss for the fourth quarter of 2008 is an approximately $3 billion impairment charge related to goodwill, intangible and other long-lived assets. In addition, the fourth quarter of 2008 was impacted by a $7 million adjustment related to intangible amortization which should have been included in prior quarterly periods of 2008.

    (2)
    Earnings per share is computed independently for each of the quarters presented. Therefore, the sum of the quarterly earnings per share may not equal the total computed for the year.

    IV-89

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    Expedia, Inc.

    Notes to Consolidated Financial Statements (Continued)

    NOTE 19—Guarantor and Non-Guarantor Supplemental Financial Information

            Condensed consolidating financial information of Expedia, Inc. (the "Parent"), our subsidiaries that are guarantors of our debt facility and instruments (the "Guarantor Subsidiaries"), and our subsidiaries that are not guarantors of our debt facility and instruments (the "Non-Guarantor Subsidiaries") is shown below. The debt facility and instruments are guaranteed by certain of our wholly-owned domestic subsidiaries and rank equally in right of payment with all of our existing and future unsecured and unsubordinated obligations. The guarantees are full, unconditional, joint and several. In this financial information, the Parent and Guarantor Subsidiaries account for investments in their wholly-owned subsidiaries using the equity method.

            During the second quarter of 2008, we reclassified amounts related to borrowings under our revolving credit facility in our condensed consolidating statements of operations, balance sheets and statements of cash flow from Parent to Guarantor Subsidiaries. There was no impact to consolidated totals. Prior periods have been restated to conform to current period presentation.


    CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
    Year Ended December 31, 2008

     
    		 Parent Guarantor
    Subsidiaries    		 Non-Guarantor
    Subsidiaries    		 Eliminations Consolidated 
     
    		 (In thousands)
    		 

    Revenue

    		 $— $2,618,064 $740,027 $(421,078)$2,937,013 

    Cost of revenue

    		  —  530,365  108,928  (4,549) 634,744 
                

    Gross profit

    		  —  2,087,699  631,099  (416,529) 2,302,269 

    Operating expenses:

    		                
     

    Selling and marketing

    		  —  1,076,662  441,189  (416,448) 1,101,403 
     

    General and administrative

    		  —  261,645  94,083  (297) 355,431 
     

    Technology and content

    		  —  155,633  53,103  216  208,952 
     

    Amortization of intangible assets

    		  —  52,928  16,508  —  69,436 
     

    Impairment of goodwill

    		  —  2,592,672  169,428  —  2,762,100 
     

    Impairment of intangbile and other long-lived assets

    		  —  198,541  35,359  —  233,900 
                

    Operating loss

    		  —  (2,250,382) (178,571) —  (2,428,953)

    Other income (expense):

    		                
     

    Equity in pre-tax earnings of consolidated subsidiaries

    		  (2,490,324) (138,939) —  2,629,263  — 
     

    Other, net

    		  (50,648) (13,719) (21,384) —  (85,751)
                

    Total other income (expense), net

    		  (2,540,972) (152,658) (21,384) 2,629,263  (85,751)
                

    Loss before income taxes and minority interest

    		  (2,540,972) (2,403,040) (199,955) 2,629,263  (2,514,704)

    Provision for income taxes

    		  23,209  (83,849) 54,674  —  (5,966)

    Minority interest in loss of consolidated subsidiaries, net

    		  —  —  2,907  —  2,907 
                

    Net loss

    		 $(2,517,763)$(2,486,889)$(142,374)$2,629,263 $(2,517,763)
                

    IV-90

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    Expedia, Inc.

    Notes to Consolidated Financial Statements (Continued)


    CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
    Year Ended December 31, 2007

     
    		 Parent Guarantor
    Subsidiaries    		 Non-Guarantor
    Subsidiaries    		 Eliminations Consolidated 
     
    		 (In thousands)
    		 

    Revenue

    		 $— $2,439,218 $598,594 $(372,480)$2,665,332 

    Cost of revenue

    		  —  471,845  95,449  (4,893) 562,401 
                

    Gross profit

    		  —  1,967,373  503,145  (367,587) 2,102,931 

    Operating expenses:

    		                
     

    Selling and marketing

    		  —  996,114  364,213  (367,767) 992,560 
     

    General and administrative

    		  —  242,818  78,232  200  321,250 
     

    Technology and content

    		  —  142,141  40,362  (20) 182,483 
     

    Amortization of intangible assets

    		  —  69,828  7,741  —  77,569 
                

    Operating income

    		  —  516,472  12,597  —  529,069 

    Other income (expense):

    		                
     

    Equity in pre-tax earnings of consolidated subsidiaries

    		  326,003  8,230  —  (334,233) — 
     

    Other, net

    		  (44,080) 12,448  (462) 9  (32,085)
                

    Total other income (expense), net

    		  281,923  20,678  (462) (334,224) (32,085)
                

    Income before income taxes and minority interest

    		  281,923  537,150  12,135  (334,224) 496,984 

    Provision for income taxes

    		  13,941  (207,877) (9,178) —  (203,114)

    Minority interest in loss of consolidated subsidiaries, net

    		  —  —  1,994  —  1,994 
                

    Net income

    		 $295,864 $329,273 $4,951 $(334,224)$295,864 
                

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    Expedia, Inc.

    Notes to Consolidated Financial Statements (Continued)


    CONDENSED COMBINING STATEMENT OF OPERATIONS
    Year Ended December 31, 2006

     
    		 Parent Guarantor
    Subsidiaries    		 Non-Guarantor
    Subsidiaries    		 Eliminations Consolidated 
     
    		 (In thousands)
    		 

    Revenue

    		 $— $2,080,327 $423,608 $(266,349)$2,237,586 

    Cost of revenue

    		  —  428,656  77,831  (3,849) 502,638 
                

    Gross profit

    		  —  1,651,671  345,777  (262,500) 1,734,948 

    Operating expenses:

    		                
     

    Selling and marketing

    		  —  790,991  257,781  (262,577) 786,195 
     

    General and administrative

    		  —  234,937  54,631  81  289,649 
     

    Technology and content

    		  —  109,805  30,570  (4) 140,371 
     

    Amortization of intangible assets

    		  —  103,720  7,046  —  110,766 
     

    Impairment of long-lived assets

    		  —  47,000  —  —  47,000 
     

    Amortization of non-cash distribution and marketing

    		  —  9,638  —  —  9,638 
                

    Operating income (loss)

    		  —  355,580  (4,251) —  351,329 

    Other income (expense):

    		                
     

    Equity in pre-tax earnings (losses) of consolidated subsidiaries

    		  245,464  (1,080) —  (244,384) — 
     

    Other, net

    		  (5,451) 37,675  1,345  —  33,569 
                

    Total other income, net

    		  240,013  36,595  1,345  (244,384) 33,569 
                

    Income (loss) before income taxes and minority interest

    		  240,013  392,175  (2,906) (244,384) 384,898 

    Provision for income taxes

    		  4,921  (143,689) (683) —  (139,451)

    Minority interest in (income) loss of consolidated subsidiaries, net

    		  —  (677) 164  —  (513)
                

    Net income (loss)

    		 $244,934 $247,809 $(3,425)$(244,384)$244,934 
                

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    Expedia, Inc.

    Notes to Consolidated Financial Statements (Continued)


    CONDENSED CONSOLIDATING BALANCE SHEET
    December 31, 2008

     
    		 Parent Guarantor
    Subsidiaries    		 Non-Guarantor
    Subsidiaries    		 Eliminations Consolidated 
     
    		 (In thousands)
    		 

    ASSETS

    		                

    Total current assets

    		 $42,084 $1,784,614 $348,496 $(976,480)$1,198,714 

    Investment in subsidiaries

    		  3,747,416  548,970  —  (4,296,386) — 

    Intangible assets, net

    		  —  685,692  147,727  —  833,419 

    Goodwill

    		  —  3,015,958  522,611  —  3,538,569 

    Other assets, net

    		  4,063  214,663  104,821  —  323,547 
                

    TOTAL ASSETS

    		 $3,793,563 $6,249,897 $1,123,655 $(5,272,866)$5,894,249 
                

    LIABILITIES AND STOCKHOLDERS' EQUITY

    		                

    Total current liabilities

    		 $570,621 $1,433,356 $538,671 $(976,480)$1,566,168 

    Long-term debt

    		  894,548  —  —  —  894,548 

    Credit facility

    		  —  650,000  —  —  650,000 

    Other liabilities and minority interest

    		  —  409,606  45,533  —  455,139 

    Stockholders' equity

    		  2,328,394  3,756,935  539,451  (4,296,386) 2,328,394 
                

    TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

    		 $3,793,563 $6,249,897 $1,123,655 $(5,272,866)$5,894,249 
                


    CONDENSED CONSOLIDATING BALANCE SHEET
    December 31, 2007

     
    		 Parent Guarantor
    Subsidiaries    		 Non-Guarantor
    Subsidiaries    		 Eliminations Consolidated 
     
    		 (In thousands)
    		 

    ASSETS

    		                

    Total current assets

    		 $18,864 $1,763,796 $147,639 $(884,644)$1,045,655 

    Investment in subsidiaries

    		  6,196,736  480,038  —  (6,676,774) — 

    Intangible assets, net

    		  —  926,023  44,734  —  970,757 

    Goodwill

    		  —  5,611,454  394,884  —  6,006,338 

    Other assets, net

    		  3,158  176,977  92,537  —  272,672 
                

    TOTAL ASSETS

    		 $6,218,758 $8,958,288 $679,794 $(7,561,418)$8,295,422 
                

    LIABILITIES AND STOCKHOLDERS' EQUITY

    		                

    Total current liabilities

    		 $900,677 $1,631,601 $126,718 $(884,644)$1,774,352 

    Long-term debt

    		  500,000  —  —     500,000 

    Credit facility

    		  —  585,000  —  —  585,000 

    Other liabilities and minority interest

    		  —  538,962  79,027  —  617,989 

    Stockholders' equity

    		  4,818,081  6,202,725  474,049  (6,676,774) 4,818,081 
                

    TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

    		 $6,218,758 $8,958,288 $679,794 $(7,561,418)$8,295,422 
                

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    Expedia, Inc.

    Notes to Consolidated Financial Statements (Continued)


    CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
    Year Ended December 31, 2008

     
    		 Parent Guarantor
    Subsidiaries    		 Non-Guarantor
    Subsidiaries    		 Consolidated 
     
    		 (In thousands)
    		 

    Operating activities:

    		             

    Net cash provided by operating activities

    		 $— $241,282 $279,406 $520,688 
              

    Investing activities:

    		             
     

    Capital expenditures, including internal-use software and website development

    		  —  (133,842) (25,985) (159,827)
     

    Acquisitions, net of cash acquired

    		  —  —  (538,439) (538,439)
     

    Reclassification of Reserve Primary Fund holdings

    		  —  (80,360) —  (80,360)
     

    Distribution from Reserve Primary Fund

    		  —  64,387  —  64,387 
     

    Net settlement of foreign currency forwards

    		  —  (55,175) —  (55,175)
     

    Purchase of short-term investments

    		  —  —  (92,923) (92,923)
     

    Other, net

    		  —  (157) 2,936  2,779 
              

    Net cash used in investing activities

    		  —  (205,147) (654,411) (859,558)
              

    Financing activities:

    		             
     

    Credit facility borrowings

    		  —  740,000  —  740,000 
     

    Credit facility repayments

    		  —  (675,000) —  (675,000)
     

    Proceeds from issuance of long-term debt, net of issuance costs

    		  392,348  —  —  392,348 
     

    Transfers (to) from related parties

    		  (386,108) 115,955  270,153  — 
     

    Other, net

    		  (6,240) 12,035  1,658  7,453 
              

    Net cash provided by financing activities

    		  —  192,990  271,811  464,801 
     

    Effect of exchange rate changes on cash and cash equivalents

    		  —  (69,983) (7,922) (77,905)
              

    Net increase (decrease) in cash and cash equivalents

    		  —  159,142  (111,116) 48,026 

    Cash and cash equivalents at beginning of year

    		  —  379,199  238,187  617,386 
              

    Cash and cash equivalents at end of year

    		 $— $538,341 $127,071 $665,412 
              

    IV-94

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    Expedia, Inc.

    Notes to Consolidated Financial Statements (Continued)


    CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
    Year Ended December 31, 2007

     
    		 Parent Guarantor
    Subsidiaries    		 Non-Guarantor
    Subsidiaries    		 Consolidated 
     
    		 (In thousands)
    		 

    Operating activities:

    		             

    Net cash provided by operating activities

    		 $— $610,105 $101,964 $712,069 
              

    Investing activities:

    		             
     

    Capital expenditures, including internal-use software and website development

    		  —  (72,263) (14,395) (86,658)
     

    Other, net

    		  —  (39,695) (53,153) (92,848)
              

    Net cash used in investing activities

    		  —  (111,958) (67,548) (179,506)
              

    Financing activities:

    		             
     

    Credit facility borrowings

    		  —  755,000  —  755,000 
     

    Credit facility repayments

    		  —  (170,000) —  (170,000)
     

    Treasury stock activity

    		  (1,397,173) —  —  (1,397,173)
     

    Transfers (to) from related parties

    		  1,399,386  (1,399,386) —  — 
     

    Excess tax benefit on equity awards

    		  95,702  —  —  95,702 
     

    Withholding taxes for stock option exercises

    		  (121,208) —  —  (121,208)
     

    Other, net

    		  23,293  14,798  9,609  47,700 
              

    Net cash provided by (used in) financing activities

    		  —  (799,588) 9,609  (789,979)
     

    Effect of exchange rate changes on cash and cash equivalents

    		  —  22,100  (572) 21,528 
              

    Net increase (decrease) in cash and cash equivalents

    		  —  (279,341) 43,453  (235,888)

    Cash and cash equivalents at beginning of year

    		  —  658,540  194,734  853,274 
              

    Cash and cash equivalents at end of year

    		 $— $379,199 $238,187 $617,386 
              

    IV-95

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    Expedia, Inc.

    Notes to Consolidated Financial Statements (Continued)


    CONDENSED COMBINING STATEMENT OF CASH FLOWS
    Year Ended December 31, 2006

     
    		 Parent Guarantor
    Subsidiaries    		 Non-Guarantor
    Subsidiaries    		 Consolidated 
     
    		 (In thousands)
    		 

    Operating activities:

    		             

    Net cash provided by operating activities

    		 $50 $578,387 $39,003 $617,440 
              

    Investing activities:

    		             
     

    Capital expenditures, including internal-use software and website development

    		  (34) (83,308) (9,289) (92,631)
     

    Other, net

    		  (16) (30,957) 10,104  (20,869)
              

    Net cash provided by (used in) investing activities

    		  (50) (114,265) 815  (113,500)
              

    Financing activities:

    		             
     

    Credit facility repayments

    		  —  (230,000) —  (230,000)
     

    Proceeds from issuance of long-term debt, net of issuance costs

    		  495,346  —  —  495,346 
     

    Treasury stock activity

    		  (295,691) —  —  (295,691)
     

    Other, net

    		  (199,655) 230,449  9,323  40,117 
              

    Net cash provided by financing activities

    		  —  449  9,323  9,772 
     

    Effect of exchange rate changes on cash and cash equivalents

    		  —  42,446  (300) 42,146 
              

    Net increase in cash and cash equivalents

    		  —  507,017  48,841  555,858 

    Cash and cash equivalents at beginning of year

    		  —  151,523  145,893  297,416 
              

    Cash and cash equivalents at end of year

    		 $— $658,540 $194,734 $853,274 
              

    IV-96

    Table of Contents


    SIGNATURES

            Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


     
     
    LIBERTY MEDIA CORPORATION

    Dated: February 26, 2009
     
    LIBERTY MEDIA CORPORATION

    Dated: February 29, 2008By
     
    By:

    /s/     GREGORY B. MAFFEI
    Gregory B. Maffei
    Chief Executive Officer and President

            Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.

    Signature
    		 
    Title
    		 
    Date

     
     
     
     
     

    /s/ JOHN C. MALONE

    John C. Malone

    		 

    Chairman of the Board and Director

    		 February 29, 200826, 2009


    /s/     GREGORY B. MAFFEI

    Gregory B. Maffei


     

    Director, Chief Executive Officer and President


     

    February 29, 200826, 2009


    /s/     ROBERT R. BENNETT

    Robert R. Bennett


     

    Director


     

    February 29, 200826, 2009


    /s/     DONNE F. FISHER

    Donne F. Fisher


     

    Director


     

    February 29, 200826, 2009


    /s/     PAUL A. GOULD

    Paul A. Gould


     

    Director


     

    February 29, 200826, 2009


    /s/ EVAN D. MALONE

    Evan D. Malone

    Director

    February 26, 2009

    /s/ DAVID E. RAPLEY

    David E. Rapley


     

    Director


     

    February 29, 200826, 2009


    /s/     M. LAVOY ROBISON

    M. LaVoy Robison


     

    Director


     

    February 29, 200826, 2009


    /s/     LARRY E. ROMRELL

    Larry E. Romrell


     

    Director


     

    February 29, 200826, 2009


    /s/     DAVID J.A. FLOWERS

    David J.A. Flowers


     

    Senior Vice President and Treasurer (Principal Financial Officer)


     

    February 29, 200826, 2009


    /s/     CHRISTOPHER W. SHEAN

    Christopher W. Shean


     

    Senior Vice President and Controller (Principal Accounting Officer)


     

    February 29, 200826, 2009

    IV-6IV-97

    Table of Contents


    EXHIBIT INDEX

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

    3—Articles of Incorporation and Bylaws:

    3.1

    Restated Certificate of Incorporation of Liberty Media Corporation ("Liberty"), dated May 9, 2006 (incorporated by reference to Exhibit 1 to the Registration Statement on Form 8-A of Liberty (File No. 000-51990) as filed on May 9, 2006 (the "Form 8-A")).

    3.2

    Bylaws of Liberty, as adopted May 9, 2006 (incorporated by reference to Exhibit 2 of the Form 8-A).

    4—Instruments Defining the Rights of Securities Holders, including Indentures:

    4.1

    Specimen certificate for shares of the Registrant's Liberty Interactive Series A common stock, par value $.01 per share (incorporated by reference to Exhibit 4.1 to Liberty's Current Report on Form 8-K (File No. 000-51990), filed on May 9, 2006 (the "May 2006 8-K")).

    4.2

    Specimen certificate for shares of the Registrant's Liberty Interactive Series B common stock, par value $.01 per share (incorporated by reference to Exhibit 4.2 to the May 2006 8-K).

    4.3

    Specimen certificate for shares of the Registrant's Liberty Capital Series A common stock, par value $.01 per share (incorporated by reference to Exhibit 4.3 to the May 2006 8-K).

    4.4

    Specimen certificate for shares of the Registrant's Liberty Capital Series B common stock, par value $.01 per share (incorporated by reference to Exhibit 4.4 to the May 2006 8-K).

    10—Material Contracts:

    10.1

    Inter-Group Agreement dated as of March 9, 1999, between AT&T Corp. and Liberty Media LLC ("Old Liberty"), Liberty Media Group LLC and each Covered Entity listed on the signature pages thereof (incorporated by reference to Exhibit 10.2 to the Registration Statement on Form S-4 of Old Liberty (File No. 333-86491) as filed on September 3, 1999, the "Old Liberty S-4 Registration Statement").

    10.2

    Ninth Supplement to Inter-Group Agreement dated as of June 14, 2001, between and among AT&T Corp., on the one hand, and Old Liberty, Liberty Media Group LLC, AGI LLC, Liberty SP, Inc., LMC Interactive, Inc. and Liberty AGI, Inc., on the other hand (incorporated by reference to Exhibit 10.25 to the Registration Statement on Form S-1 of Old Liberty (File No. 333-66034) as filed on July 27, 2001).

    10.3

    Intercompany Agreement dated as of March 9, 1999, between Old Liberty and AT&T Corp. (incorporated by reference to Exhibit 10.3 to the Old Liberty S-4 Registration Statement).

    10.4

    Tax Sharing Agreement dated as of March 9, 1999, by and among AT&T Corp., Old Liberty, Tele-Communications, Inc., Liberty Ventures Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings, Inc. and each Covered Entity listed on the signature pages thereof (incorporated by reference to Exhibit 10.4 to the Old Liberty S-4 Registration Statement).

    10.5

    First Amendment to Tax Sharing Agreement dated as of May 28, 1999, by and among AT&T Corp., Old Liberty, Tele-Communications, Inc., Liberty Ventures Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings,  Inc. and each Covered Entity listed on the signature pages thereof (incorporated by reference to Exhibit 10.5 to the Old Liberty S-4 Registration Statement).

    3—Articles of Incorporation and Bylaws:

      3.1
      Restated Certificate of Incorporation of Liberty Media Corporation ("Liberty"), dated March 3, 2008 (incorporated by reference to Exhibit 3.1 to the Registration Statement on Form S-4 of Liberty (File No. 333-145936) as filed on September 7, 2007 (the "S-4 Registration Statement")).

      3.2
      Bylaws of the Company (as amended and restated August 12, 2008) (incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K (File No. 001-33982) filed on August 14, 2008).

    4—Instruments Defining the Rights of Securities Holders, including Indentures:

      4.1
      Specimen certificate for shares of the Registrant's Liberty Interactive Series A common stock, par value $.01 per share (incorporated by reference to Exhibit 4.1 to Liberty's Current Report on Form 8-K (File No. 000-51990), filed on May 9, 2006 (the "May 2006 8-K")).

      4.2
      Specimen certificate for shares of the Registrant's Liberty Interactive Series B common stock, par value $.01 per share (incorporated by reference to Exhibit 4.2 to the May 2006 8-K).

      4.3
      Specimen certificate for shares of the Registrant's Liberty Capital Series A common stock, par value $.01 per share (incorporated by reference to Exhibit 4.3 to the May 2006 8-K).

      4.4
      Specimen certificate for shares of the Registrant's Liberty Capital Series B common stock, par value $.01 per share (incorporated by reference to Exhibit 4.4 to the May 2006 8-K).

      4.5
      Specimen certificate for shares of the Registrant's Series A Liberty Entertainment common stock, par value $.01 per share (incorporated by reference to Exhibit 4.3 to the S-4 Registration Statement).

      4.6
      Specimen certificate for shares of the Registrant's Series B Liberty Entertainment common stock, par value $.01 per share (incorporated by reference to Exhibit 4.4 to the S-4 Registration Statement).

      4.7
      The Registrant undertakes to furnish to the Securities and Exchange Commission, upon request, a copy of all instruments with respect to long-term debt not filed herewith.

    10—Material Contracts:

      10.1
      Tax Sharing Agreement dated as of March 9, 1999, by and among AT&T Corp., Liberty Media LLC ("Old Liberty"), Tele-Communications, Inc., Liberty Ventures Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings, Inc. and each Covered Entity listed on the signature pages thereof (incorporated by reference to Exhibit 10.4 to the Registration Statement on Form S-4 of Old Liberty (File No. 333-86491) as filed on September 3, 1999 (the "Old Liberty S-4 Registration Statement")).

      10.2
      First Amendment to Tax Sharing Agreement dated as of May 28, 1999, by and among AT&T Corp., Old Liberty, Tele-Communications, Inc., Liberty Ventures Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings, Inc. and each Covered Entity listed on the signature pages thereof (incorporated by reference to Exhibit 10.5 to the Old Liberty S-4 Registration Statement).

      10.3
      Second Amendment to Tax Sharing Agreement dated as of September 24, 1999, by and among AT&T Corp., Old Liberty, Tele-Communications, Inc., Liberty Ventures Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings, Inc. and each Covered Entity listed on the signature pages thereof (incorporated by reference to Exhibit 10.6 to the


    10.6

    Second Amendment to Tax Sharing Agreement dated as of September 24, 1999, by and among AT&T Corp., Old Liberty, Tele-Communications, Inc., Liberty Ventures Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings, Inc. and each Covered Entity listed on the signature pages thereof (incorporated by reference to Exhibit 10.6 to the Registration Statement on Form S-1 of Old Liberty (File No. 333-93917) as filed on December 30, 1999 (the "Old Liberty S-1 Registration Statement")).

    10.7

    Third Amendment to Tax Sharing Agreement dated as of October 20, 1999, by and among AT&T Corp., Old Liberty, Tele-Communications, Inc., Liberty Ventures Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings,  Inc. and each Covered Entity listed on the signature pages thereof (incorporated by reference to Exhibit 10.7 to the Old Liberty S-l Registration Statement).

    10.8

    Fourth Amendment to Tax Sharing Agreement dated as of October 28, 1999, by and among AT&T Corp., Old Liberty, Tele-Communications, Inc., Liberty Ventures Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings, Inc. and each Covered Entity listed on the signature pages thereof (incorporated by reference to Exhibit 10.8 to the Old Liberty S-l Registration Statement).

    10.9

    Fifth Amendment to Tax Sharing Agreement dated as of December 6, 1999, by and among AT&T Corp., Old Liberty, Tele-Communications, Inc., Liberty Ventures Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings,  Inc. and each Covered Entity listed on the signature pages thereof (incorporated by reference to Exhibit 10.9 to the Old Liberty S-l Registration Statement).

    10.10

    Sixth Amendment to Tax Sharing Agreement dated as of December 10, 1999, by and among AT&T Corp., Old Liberty, Tele-Communications, Inc., Liberty Ventures Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings, Inc. and each Covered Entity listed on the signature pages thereof (incorporated by reference to Exhibit 10.10 to the Old Liberty S-l Registration Statement).

    10.11

    Seventh Amendment to Tax Sharing Agreement dated as of December 30, 1999, by and among AT&T Corp., Old Liberty, Tele-Communications, Inc., Liberty Ventures Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings, Inc. and each Covered Entity listed on the signature pages thereof (incorporated by reference to Exhibit 10.11 to the Old Liberty S-l Registration Statement).

    10.12

    Eighth Amendment to Tax Sharing Agreement dated as of July 25, 2000, by and among AT&T Corp., Old Liberty, Tele-Communications, Inc., Liberty Ventures Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings,  Inc. and each Covered Entity listed on the signature pages thereof (incorporated by reference to Exhibit 10.12 to the Registration Statement on Form S-1 of Old Liberty (File No. 333-55998) as filed on February 21, 2001).

    10.13

    Instrument dated January 14, 2000, adding The Associated Group, Inc. as a party to the Tax Sharing Agreement dated as of March 9, 1999, as amended, among The Associated Group, Inc., AT&T Corp., Old Liberty, Tele-Communications,  Inc., Liberty Ventures Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings, Inc. and each Covered Entity listed on the signature pages thereof (incorporated by reference to Exhibit 10.12 to the Old Liberty S-1 Registration Statement).

    10.14

    Restated and Amended Employment Agreement dated November 1, 1992, between Tele-Communications, Inc. and John C. Malone (assumed by Old Liberty as of March 9, 1999), and the amendment thereto dated June 30, 1999 and effective as of March 9, 1999, between Old Liberty and John C. Malone (collectively, the "Malone Employment Agreement") (incorporated by reference to Exhibit 10.6 to the Old Liberty S-4 Registration Statement).

    Table of Contents

        Registration Statement on Form S-1 of Old Liberty (File No. 333-93917) as filed on December 30, 1999 (the "Old Liberty S-1 Registration Statement")).

      10.4
      Third Amendment to Tax Sharing Agreement dated as of October 20, 1999, by and among AT&T Corp., Old Liberty, Tele-Communications, Inc., Liberty Ventures Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings, Inc. and each Covered Entity listed on the signature pages thereof (incorporated by reference to Exhibit 10.7 to the Old Liberty S-l Registration Statement).

      10.5
      Fourth Amendment to Tax Sharing Agreement dated as of October 28, 1999, by and among AT&T Corp., Old Liberty, Tele-Communications, Inc., Liberty Ventures Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings, Inc. and each Covered Entity listed on the signature pages thereof (incorporated by reference to Exhibit 10.8 to the Old Liberty S-l Registration Statement).

      10.6
      Fifth Amendment to Tax Sharing Agreement dated as of December 6, 1999, by and among AT&T Corp., Old Liberty, Tele-Communications, Inc., Liberty Ventures Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings, Inc. and each Covered Entity listed on the signature pages thereof (incorporated by reference to Exhibit 10.9 to the Old Liberty S-l Registration Statement).

      10.7
      Sixth Amendment to Tax Sharing Agreement dated as of December 10, 1999, by and among AT&T Corp., Old Liberty, Tele-Communications, Inc., Liberty Ventures Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings, Inc. and each Covered Entity listed on the signature pages thereof (incorporated by reference to Exhibit 10.10 to the Old Liberty S-l Registration Statement).

      10.8
      Seventh Amendment to Tax Sharing Agreement dated as of December 30, 1999, by and among AT&T Corp., Old Liberty, Tele-Communications, Inc., Liberty Ventures Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings, Inc. and each Covered Entity listed on the signature pages thereof (incorporated by reference to Exhibit 10.11 to the Old Liberty S-l Registration Statement).

      10.9
      Eighth Amendment to Tax Sharing Agreement dated as of July 25, 2000, by and among AT&T Corp., Old Liberty, Tele-Communications, Inc., Liberty Ventures Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings, Inc. and each Covered Entity listed on the signature pages thereof (incorporated by reference to Exhibit 10.12 to the Registration Statement on Form S-1 of Old Liberty (File No. 333-55998) as filed on February 21, 2001).

      10.10
      Instrument dated January 14, 2000, adding The Associated Group, Inc. as a party to the Tax Sharing Agreement dated as of March 9, 1999, as amended, among The Associated Group, Inc., AT&T Corp., Old Liberty, Tele-Communications, Inc., Liberty Ventures Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings, Inc. and each Covered Entity listed on the signature pages thereof (incorporated by reference to Exhibit 10.12 to the Old Liberty S-1 Registration Statement).

      10.11
      Restated and Amended Employment Agreement dated November 1, 1992, between Tele-Communications, Inc. and John C. Malone (assumed by Old Liberty as of March 9, 1999), and the amendment thereto dated June 30, 1999 and effective as of March 9, 1999, between Old Liberty and John C. Malone (collectively, the "Malone Employment Agreement") (incorporated by reference to Exhibit 10.6 to the Old Liberty S-4 Registration Statement).

      10.12
      Second Amendment to Malone Employment Agreement effective January 1, 2003 (incorporated by reference to Exhibit 10.15 to Old Liberty's Annual Report on Form 10-K for the year ended December 31, 2003 (File No. 001-16615) as filed on March 15, 2004).

      10.13
      Third Amendment to Malone Employment Agreement effective January 1, 2007.*


    10.15

    Second Amendment to Malone Employment Agreement effective January 1, 2003 (incorporated by reference to Exhibit 10.15 to Old Liberty's Annual Report on Form 10-K for the year ended December 31, 2003 (File No. 001-16615) as filed on March 15, 2004 (the "Old Liberty 2003 10-K")).

    10.16

    Liberty Media Corporation 2000 Incentive Plan (As Amended and Restated Effective February 22, 2007) (the "2000 Incentive Plan") (incorporated by reference to Exhibit 10.2 to Liberty's Quarterly Report on Form 10-Q for the period ended September 30, 2007 (File No. 000-51990) as filed on November 9, 2007).

    10.17

    Liberty Media Corporation 2007 Incentive Plan (the "2007 Incentive Plan") (incorporated by reference to Exhibit 10.1 to Liberty's Quarterly Report on Form 10-Q for the period ended September 30, 2007 (File No. 000-51990) as filed on November 9, 2007).

    10.18

    Form of Non-Qualified Stock Option Agreement under the 2000 Incentive Plan and the 2007 Incentive Plan [for certain designated award recipients] (incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q of Old Liberty for the quarter ended March 31, 2006 (File No. 001-16615) as filed on May 8, 2006 (the "Old Liberty 10-Q")).

    10.19

    Form of Non-Qualified Stock Option Agreement under the 2000 Incentive Plan and the 2007 Incentive Plan [for all other award recipients] (incorporated by reference to Exhibit 10.3 of the Old Liberty 10-Q).

    10.20

    Form of Restricted Stock Award Agreement under the 2000 Incentive Plan and the 2007 Incentive Plan [for certain designated award recipients] (incorporated by reference to Exhibit 10.4 to the Old Liberty 10-Q).

    10.21

    Form of Stock Appreciation Rights Agreement under the 2000 Incentive Plan and the 2007 Incentive Plan (incorporated by reference to Exhibit 10.18 to the Annual Report on Form 10-K of Old Liberty for the year ended December 31, 2004 (File No. 001-16615) as filed on March 15, 2005 (the "Old Liberty 2005 10-K")).

    10.22

    Liberty Media Corporation 2002 Nonemployee Director Incentive Plan (As amended and restated Effective August 15, 2007) (the "Director Plan") (incorporated by reference to Exhibit 10.3 to Liberty's Quarterly Report on Form 10-Q for the period ended September 30, 2007 (File No. 000-51990) as filed on November 9, 2007).

    10.23

    Form of Stock Appreciation Rights Agreement under the Director Plan (incorporated by reference to Exhibit 10.21 to the Old Liberty 2005 10-K).

    10.24

    Liberty Media Corporation 2006 Deferred Compensation Plan (incorporated by reference to Exhibit 99.1 to Liberty's Current Report on Form 8-K (File No. 000-51990) as filed on January 5, 2007).

    10.25

    Employment Agreement, dated as of December 28, 2005, between Old Liberty and Mr. Bennett (incorporated by reference to Exhibit 99.1 to Old Liberty's Current Report on Form 8-K (File No. 001-16615) as filed on December 30, 2005 (the "Old Liberty December 2005 8-K")).

    10.26

    Amended and Restated Deferred Compensation Agreement, dated as of December 28, 2005, between Old Liberty and Mr. Bennett (incorporated by reference to Exhibit 99.2 to the Old Liberty December 2005 8-K).

    10.27

    Amended and Restated Deferred Compensation Agreement, dated as of December 28, 2005, between Mr. Bennett and Old Liberty (incorporated by reference to Exhibit 99.3 to the Old Liberty December 2005 8-K).

    Table of Contents

        10.14
        Fourth Amendment to Malone Employment Agreement effective January 1, 2009.*

        10.15
        Liberty Media Corporation 2000 Incentive Plan (As Amended and Restated Effective February 22, 2007) (the "2000 Incentive Plan").*

        10.16
        Liberty Media Corporation 2007 Incentive Plan (the "2007 Incentive Plan").*

        10.17
        Form of Non-Qualified Stock Option Agreement under the 2000 Incentive Plan and the 2007 Incentive Plan [for certain designated award recipients] (incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q of Old Liberty for the quarter ended March 31, 2006 (File No. 001-16615) as filed on May 8, 2006 (the "Old Liberty 10-Q")).

        10.18
        Form of Non-Qualified Stock Option Agreement under the 2000 Incentive Plan and the 2007 Incentive Plan [for all other award recipients] (incorporated by reference to Exhibit 10.3 of the Old Liberty 10-Q).

        10.19
        Form of Restricted Stock Award Agreement under the 2000 Incentive Plan and the 2007 Incentive Plan [for certain designated award recipients] (incorporated by reference to Exhibit 10.4 to the Old Liberty 10-Q).

        10.20
        Form of Stock Appreciation Rights Agreement under the 2000 Incentive Plan and the 2007 Incentive Plan (incorporated by reference to Exhibit 10.18 to the Annual Report on Form 10-K of Old Liberty for the year ended December 31, 2004 (File No. 001-16615) as filed on March 15, 2005 (the "Old Liberty 2005 10-K")).

        10.21
        Liberty Media Corporation 2002 Nonemployee Director Incentive Plan (As Amended and Restated Effective August 15, 2007) (the "Director Plan").*

        10.22
        Form of Stock Appreciation Rights Agreement under the Director Plan (incorporated by reference to Exhibit 10.21 to the Old Liberty 2005 10-K).

        10.23
        Liberty Media Corporation 2006 Deferred Compensation Plan (incorporated by reference to Exhibit 99.1 to Liberty's Current Report on Form 8-K (File No. 000-51990) as filed on January 5, 2007).

        10.24
        Employment Agreement, dated as of December 28, 2005, between Old Liberty and Mr. Bennett (incorporated by reference to Exhibit 99.1 to Old Liberty's Current Report on Form 8-K (File No. 001-16615) as filed on December 30, 2005).

        10.25
        Letter Agreement regarding personal use of Liberty's aircraft, dated as of February 22, 2008, between Gregory B. Maffei and Liberty (incorporated by reference to Exhibit 10.38 to Liberty's Annual Report on Form 10-K for the year ended December 31, 2007 (File No. 000-51990) as filed on February 29, 2008).

        10.26
        Call Agreement, dated as of February 9, 1998 (the "Call Agreement"), between Liberty (as successor of Old Liberty which was the assignee of Tele-Communications, Inc.) and the Malone Group.*

        10.27
        Letter, dated as of March 5, 1999, from Tele-Communications, Inc. and Old Liberty addressed to Mr. Malone and Leslie Malone relating to the Call Agreement (incorporated by reference to Exhibit 7(f) to Mr. Malone's Schedule 13D filed in respect of AT&T on March 30, 1999 (File No. 005-32542)).

        10.28
        $3,500,000,000 Credit Agreement, dated as of March 3, 2006, among QVC, Inc., as Borrower; the Lenders party hereto; JP Morgan Chase Bank, N.A., as Administrative Agent; and Wachovia Capital Markets, LLC, as Syndication Agent (the "March 2006 Credit Agreement") (incorporated by reference to Exhibit 10.1 to the Old Liberty 10-Q).

        10.29
        Amendment dated October 4, 2006 to the March 2006 Credit Agreement (incorporated by reference to Exhibit 99.2 to Liberty's Current Report on Form 8-K (File No. 000-51990) as filed on October 10, 2006 (the "October 2006 8-K")).


      10.28

      Deferred Compensation Agreement, dated as of July 1, 2005, between Mr. Bennett and Old Liberty (incorporated by reference to Exhibit 99.4 to the Old Liberty December 2005 8-K).

      10.29

      Call Agreement, dated as of February 9, 1998 (the "Call Agreement"), between Liberty (as successor of Old Liberty which was the assignee of Tele-Communications, Inc.) and the Malone Group (incorporated by reference to Exhibit 7(n) to Mr. Malone's Amendment No. 8 to Schedule 13D filed in respect of Tele-Communications, Inc. on February 19, 1998 (File No. 005-44063)).

      10.30

      Letter, dated as of March 5, 1999, from Tele-Communications, Inc. and Old Liberty addressed to Mr. Malone and Leslie Malone relating to the Call Agreement (incorporated by reference to Exhibit 7(f) to Mr. Malone's Schedule 13D filed in respect of AT&T on March 30, 1999 (File No. 005-32542)).

      10.31

      $3,500,000,000 Credit Agreement, dated as of March 3, 2006, among QVC, Inc., as Borrower; the Lenders party hereto; JP Morgan Chase Bank, N.A., as Administrative Agent; and Wachovia Capital Markets, LLC, as Syndication Agent (the "March 2006 Credit Agreement") (incorporated by reference to Exhibit 10.1 to the Old Liberty 10-Q).

      10.32

      Amendment dated October 4, 2006 to the March 2006 Credit Agreement (incorporated by reference to Exhibit 99.2 to Liberty's Current Report on Form 8-K (File No. 000-51990) as filed on October 10, 2006 (the "October 2006 8-K")).

      10.33

      $1,750,000,000 Credit Agreement, dated as of October 4, 2006 among QVC, Wachovia Bank, N.A., as Administrative Agent, Bank of America N.A. and J.P. Morgan Securities Inc., as Syndication Agents, and the lenders party thereto from time to time (incorporated by reference to Exhibit 99.1 to the October 2006 8-K).

      10.34

      Form of Indemnification Agreement between Liberty and its executive officers/directors (incorporated by reference to Exhibit 10.37 to Liberty's Annual Report on Form 10-K for the year ended December 31, 2006 (File No. 000-51990) as filed on March 1, 2007).

      10.35

      Share Exchange Agreement, dated as of December 22, 2006, by and between News Corporation and Liberty (the "News Agreement") (incorporated by reference to Exhibit 10.38 to Liberty's Annual Report on Form 10-K for the year ended December 31, 2006 (File No. 000-51990) as filed on March 1, 2007).

      10.36

      Tax Matters Agreement, dated as of December 22, 2006, by and between News Corporation and Liberty (which is Exhibit A-I to the News Agreement) (incorporated by reference to Exhibit 10.39 to Liberty's Annual Report on Form 10-K for the year ended December 31, 2006 (File No. 000-51990) as filed on March 1, 2007).

      10.37

      Letter Agreement regarding personal use of Liberty's aircraft, dated as of April 2, 2007, between Gregory B. Maffei and Liberty (superceded by Letter Agreement filed as Exhibit 10.38 hereto) (incorporated by reference to Exhibit 10.1 to Liberty's Quarterly Report on Form 10-Q for the period ended March 31, 2007 (File No. 000-51990) as filed on May 8, 2007).

      10.38

      Letter Agreement regarding personal use of Liberty's aircraft, dated as of February 22, 2008, between Gregory B. Maffei and Liberty.*

      21

      Subsidiaries of Liberty Media Corporation.*

      23

      Consent of KPMG LLP.*

      31.1

      Rule 13a-14(a)/15d-14(a) Certification.*

      31.2

      Rule 13a-14(a)/15d-14(a) Certification.*

      31.3

      Rule 13a-14(a)/15d-14(a) Certification.*

      Table of Contents


      32

      Section 1350 Certification. *

      99.1

      Unaudited Attributed Financial Information for Tracking Stock Groups.*
          10.30
          $1,750,000,000 Credit Agreement, dated as of October 4, 2006 among QVC, Wachovia Bank, N.A., as Administrative Agent, Bank of America N.A. and J.P. Morgan Securities Inc., as Syndication Agents, and the lenders party thereto from time to time (incorporated by reference to Exhibit 99.1 to the October 2006 8-K).

          10.31
          Form of Indemnification Agreement between Liberty and its executive officers/directors (incorporated by reference to Exhibit 10.37 to Liberty's Annual Report on Form 10-K for the year ended December 31, 2006 (File No. 000-51990) as filed on March 1, 2007).

          10.32
          Share Exchange Agreement, dated as of December 22, 2006, by and between News Corporation and Liberty (the "News Agreement") (incorporated by reference to Exhibit 10.38 to Liberty's Annual Report on Form 10-K for the year ended December 31, 2006 (File No. 000-51990) as filed on March 1, 2007).

          10.33
          Tax Matters Agreement, dated as of December 22, 2006, by and between News Corporation and Liberty (which is Exhibit A-I to the News Agreement) (incorporated by reference to Exhibit 10.39 to Liberty's Annual Report on Form 10-K for the year ended December 31, 2006 (File No. 000-51990) as filed on March 1, 2007).

          10.34
          Letter Agreement, dated as of May 6, 2008, by and among The DirecTV Group, Inc., Liberty, Greenlady Corporation and Greenlady II, LLC (incorporated by reference to Exhibit 10.1 to The DirecTV Group, Inc.'s Current Report on Form 8-K (File No. 001-31945) as filed on May 7, 2008).

        21—Subsidiaries of Liberty Media Corporation.*

        23
        Consent of KPMG LLP.*

        23.1
        Consent of Deloitte & Touche LLP*

        23.2
        Consent of Ernst & Young LLP*

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

        31.2
        Rule 13a-14(a)/15d-14(a) Certification.*

        31.3
        Rule 13a-14(a)/15d-14(a) Certification.*

        32
        Section 1350 Certification.*

        99.1
        Unaudited Attributed Financial Information for Tracking Stock Groups.*
        *
        Filed herewith.