Directv Financing 10-Q 2008 Q3 Quarterly report

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

FORM 10-Q

(Mark One)
ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2008
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 333-106529

DIRECTV HOLDINGS LLC
DIRECTV FINANCING CO., INC.
(Exact name of registrant as specified in its charter)

DIRECTV Holdings LLC—Delaware DIRECTV Financing Co., Inc.—Delaware (State or other jurisdiction of incorporation or organization)	25-1902628 59-3772785 (I.R.S. Employer Identification Number)
2230 East Imperial Highway, El Segundo, California (Address of principal executive offices)	90245 (Zip Code)
(310) 964-5000 (Registrant's telephone number, including area code)
N/A (Former name, former address and former fiscal year, if changed since last report)

        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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesý Noo

        Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, 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 filero Accelerated filero Non-accelerated filerý
(Do not check if a smaller reporting company) Smaller reporting companyo

        Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o    No ý

        The registrant has met the conditions set forth in General Instructions H(1) (a) and (b) of Form 10-Q and is therefore filing this Quarterly Report on Form 10-Q with the reduced disclosure format.

DIRECTV HOLDINGS LLC

TABLE OF CONTENTS

			Page No
Part I—Financial Information (Unaudited)
	Item 1. Financial Statements
		Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2008 and 2007	1
		Consolidated Balance Sheets as of September 30, 2008 and December 31, 2007	2
		Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2008 and 2007	3
		Notes to the Consolidated Financial Statements	4
	Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations		21
	Item 4T. Controls and Procedures		33
Part II—Other Information
	Item 1. Legal Proceedings		34
	Item 1A. Risk Factors		35
	Item 6. Exhibits		36
Signature			37

DIRECTV HOLDINGS LLC

PART I—FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

			Three Months Ended September 30,						Nine Months Ended September 30,
			2008			2007			2008			2007
			(Dollars in Millions)
Revenues			$	4,324		$	3,885		$	12,569		$	11,150
Operating costs and expenses
	Costs of revenues, exclusive of depreciation and amortization expense
		Broadcast programming and other		1,841			1,657			5,216			4,653
		Subscriber service expenses		296			291			839			852
		Broadcast operations expenses		71			56			197			161
	Selling, general and administrative expenses, exclusive of depreciation and amortization expense
		Subscriber acquisition costs		565			498			1,602			1,377
		Upgrade and retention costs		260			268			724			691
		General and administrative expenses		231			199			656			569
	Depreciation and amortization expense			528			378			1,493			1,021
Total operating costs and expenses				3,792			3,347			10,727			9,324
Operating profit				532			538			1,842			1,826
Interest income				9			16			31			60
Interest expense				(94	)		(56	)		(222	)		(162	)
Other, net				1			1			2			—
Income before income taxes				448			499			1,653			1,724
Income tax expense				(182	)		(198	)		(653	)		(682	)
Net income			$	266		$	301		$	1,000		$	1,042

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

1

DIRECTV HOLDINGS LLC

CONSOLIDATED BALANCE SHEETS

(Unaudited)

			September 30, 2008		December 31, 2007
			(Dollars in Millions)
ASSETS
Current assets
	Cash and cash equivalents		$	1,563	$	802
	Accounts receivable, net of allowances of $44 and $39			1,254		1,387
	Inventories			239		187
	Deferred income taxes			60		29
	Prepaid expenses and other			169		142
		Total current assets		3,285		2,547
Satellites, net				2,011		2,030
Property and equipment, net				3,292		3,230
Goodwill				3,188		3,032
Intangible assets, net				959		1,223
Other assets				181		235
		Total assets	$	12,916	$	12,297
LIABILITIES AND OWNER'S EQUITY
Current liabilities
	Accounts payable and accrued liabilities		$	2,217	$	2,548
	Unearned subscriber revenues and deferred credits			441		320
	Current portion of long-term debt			95		48
		Total current liabilities		2,753		2,916
Long-term debt				5,755		3,347
Deferred income taxes				399		336
Other liabilities and deferred credits				825		958
Commitments and contingencies
Owner's equity
	Capital stock and additional paid-in capital			2,826		2,782
	Retained earnings			358		1,958
		Total owner's equity		3,184		4,740
		Total liabilities and owner's equity	$	12,916	$	12,297

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

2

DIRECTV HOLDINGS LLC

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

				Nine Months Ended September 30,
				2008			2007
				(Dollars in Millions)
Cash Flows from Operating Activities
Net income				$	1,000		$	1,042
Adjustments to reconcile net income to net cash provided by operating activities:
	Depreciation and amortization expense				1,493			1,021
	Amortization of deferred revenues and deferred credits				(75	)		(69	)
	Deferred income taxes				36			114
	Other				41			36
	Change in other operating assets and liabilities
		Accounts receivable			139			(21	)
		Inventories			(35	)		(58	)
		Prepaid expenses and other			(17	)		(68	)
		Accounts payable and accrued liabilities			(431	)		(136	)
		Unearned subscriber revenue and deferred credits			121			183
		Other, net			58			(12	)
			Net cash provided by operating activities		2,330			2,032
Cash Flows from Investing Activities
	Cash paid for property and equipment				(343	)		(476	)
	Cash paid for subscriber leased equipment—subscriber acquisitions				(432	)		(580	)
	Cash paid for subscriber leased equipment—upgrade and retention				(373	)		(579	)
	Cash paid for satellites				(92	)		(149	)
	Investment in companies, net of cash acquired				(97	)		—
	Other				4			(3	)
			Net cash used in investing activities		(1,333	)		(1,787	)
Cash Flows from Financing Activities
	Cash proceeds from debt issuance				2,490			—
	Debt issuance costs				(19	)		—
	Repayment of long-term debt				(35	)		(8	)
	Repayment of other long-term obligations				(79	)		(54	)
	Cash dividends to Parent				(2,600	)		(700	)
	Excess tax benefit from share-based compensation				7			4
			Net cash used in financing activities		(236	)		(758	)
Net increase in cash and cash equivalents					761			(513	)
Cash and cash equivalents at beginning of the period					802			1,356
Cash and cash equivalents at the end of the period				$	1,563		$	843
Supplemental cash flow information
Cash paid for interest				$	175		$	162
Cash paid for income taxes					585			624

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

3

DIRECTV HOLDINGS LLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1: Basis of Presentation

        DIRECTV Holdings LLC is a wholly-owned subsidiary of The DIRECTV Group, Inc. and consists of DIRECTV Enterprises, LLC and its wholly-owned subsidiaries and DIRECTV Financing Co., Inc. We sometimes refer to DIRECTV Holdings LLC as DIRECTV Holdings, DIRECTV, we or us and sometimes refer to The DIRECTV Group, Inc. as The DIRECTV Group or Parent.

        On February 27, 2008, Liberty Media Corporation, or Liberty Media, and News Corporation completed a transaction in which Liberty Media acquired News Corporation's approximately 41% interest in our Parent, which we refer to as the Liberty Transaction. Currently, Liberty Media owns approximately 52% of our Parent's outstanding common stock, however Liberty Media has agreed to limit its voting rights to approximately 47.9%. See The DIRECTV Group's Current Report on Form 8-K filed with the Securities and Exchange Commission, or SEC, on May 7, 2008 for further discussion of this agreement.

        We have prepared the accompanying unaudited consolidated financial statements in accordance with accounting principles generally accepted in the United States of America, or GAAP, for interim financial reporting. In the opinion of management, all adjustments (consisting only of normal recurring items) that are necessary for a fair presentation have been included. The results for interim periods are not necessarily indicative of results that may be expected for any other interim period or for the full year. For further information, refer to the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2007 filed with the SEC on February 27, 2008, our Quarterly Reports on Form 10-Q for the quarter ended March 31, 2008 filed with the SEC on May 7, 2008, and for the quarter ended June 30, 2008 filed with the SEC on August 7, 2008, and all of our other filings, including Current Reports on Form 8-K, filed with the SEC after such date and through the date of this report.

Note 2: Accounting Changes and New Accounting Standards

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 results of operations or financial position, 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 in 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 Financial Accounting Standards Board, or FASB, that require or permit fair value measurements. Our adoption of SFAS No. 157 did not have any effect on our consolidated results of operations or financial position.

4

DIRECTV HOLDINGS LLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

        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 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 results of operations or financial position.

New Accounting Standards

        In December 2007, the FASB issued SFAS No.160, "Noncontrolling Interests in Consolidated Financial Statements—an amendment to ARB No. 51." SFAS No. 160 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 financial statements. We do not expect the adoption of SFAS No. 160 to have any effect on our consolidated results of operations and financial position when adopted, as required, on January 1, 2009.

        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. Otherwise, we do not expect the adoption of SFAS No. 141R to have any effect on our consolidated results of operations and financial position.

Note 3: Goodwill and Intangible Assets

        The changes in the carrying amounts of goodwill by reporting unit for the nine months ended September 30, 2008 were as follows:

	(Dollars in Millions)
Balance as of December 31, 2007	$	3,032
Acquisitions of home service providers		156
Balance as of September 30, 2008	$	3,188

5

DIRECTV HOLDINGS LLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

        The following table sets forth the amounts recorded for intangible assets as of the periods presented:

		Estimated Useful Lives (years)	September 30, 2008						December 31, 2007
			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		219	$	170		49		219	$	140		79
Subscriber related		5-10		1,348		1,052		296		1,348		860		488
Dealer network		15		130		77		53		130		71		59
Distribution rights		7		334		205		129		334		169		165
	Total intangible assets		$	2,463	$	1,504	$	959	$	2,463	$	1,240	$	1,223

        The following table sets forth amortization expense for intangible assets for each of the periods presented:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2008		2007		2008		2007
	(Dollars in Millions)
Amortization expense	$	88	$	88	$	264	$	265

        Estimated amortization expense for intangible assets in each of the next five years and thereafter is as follows: $88 million for the remainder of 2008, $289 million in 2009, $90 million in 2010, $34 million in 2011, $10 million in 2012 and $16 million thereafter.

Note 4: Borrowings

        The following table sets forth our outstanding borrowings:

		Interest Rates at September 30, 2008			September 30, 2008		December 31, 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 September 30, 2008			5.220	%		2,438		1,483
Unamortized bond premium			—			2		2
	Total debt					5,850		3,395
Less: current portion of long-term debt						95		48
	Long-term debt				$	5,755	$	3,347

        The 8.375% senior notes and the 6.375% senior notes are registered under the Securities Act of 1933, as amended.

6

DIRECTV HOLDINGS LLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

2008 Financing Transactions

        In May 2008, we 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.

        We 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 our current and certain of its future domestic subsidiaries on a senior unsecured basis. Pursuant to a registration rights agreement with the initial purchasers of the senior notes, we filed an exchange offer registration statement permitting the existing holders of the senior notes to exchange 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. The exchange offer is presently scheduled to expire on November 11, 2008.

        We also amended our 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 our assets and the assets of our current and certain of our future domestic subsidiaries and is fully and unconditionally guaranteed, jointly and severally, by substantially all of our current and certain of our future domestic subsidiaries.

Notes Payable

        The fair value of our 8.375% senior notes was approximately $904 million at September 30, 2008 and approximately $948 million at December 31, 2007. The fair value of our 6.375% senior notes was approximately $879 million at September 30, 2008 and approximately $962 million at December 31, 2007. The fair value of our 7.625% senior notes was approximately $1,371 million at September 30, 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.

Other

        Our notes payable and senior secured credit facility mature as follows: $17 million in the remainder of 2008, $108 million in 2009, $308 million in 2010, $108 million in 2011, $20 million in 2012 and $5,296 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 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 year ended December 31, 2007 and do not currently expect to be required to make a prepayment for the year ending December 31, 2008. The amount of interest accrued related to our outstanding debt was $68 million at September 30, 2008 and $26 million at December 31, 2007.

         Covenants and Restrictions.    The senior secured credit facility requires us to comply with certain financial covenants. The senior notes and the senior secured credit facility also include covenants that restrict our ability to, among other things, (i) incur additional indebtedness, (ii) incur liens, (iii) pay

7

DIRECTV HOLDINGS LLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

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 our 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 we fail to comply with these covenants, all or a portion of our borrowings under the senior notes and senior secured credit facility could become immediately payable and our revolving credit facility could be terminated. At September 30, 2008, we were 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 Parent's outstanding common stock. There was no ratings decline for the senior notes associated with that event, and we were 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.

Note 5: Contingencies

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 September 30, 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 results of operations or financial position.

         Finisar Corporation.    As previously reported, we filed a notice of appeal to the Court of Appeals for the Federal Circuit on October 5, 2006 from a jury determination that The DIRECTV Group, Inc. and certain of its subsidiaries willfully infringed a patent owned by Finisar Corporation and an award by the jury of 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 to Finisar. 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 vacated (set aside) the verdict of infringement, and sent the case back to the district court for further proceedings and possible retrial on a limited number of claims. The Court of Appeals ruled that the lower court had used erroneous interpretations of certain important terms in the patent claims. Thus, the district court must now determine whether there is any infringement using the correct interpretations, which are the ones we originally suggested. Regarding our defenses of invalidity, the Court of Appeals found that one of the principal independent claims of the patent is clearly anticipated by the prior art we presented. The Court of Appeals then remanded the question of validity for the remaining claims back to the district court for further consideration in view of this invalidity ruling. The Court of Appeals also reversed the verdict of willful infringement, and affirmed earlier rulings of the district court that held several additional claims to be invalid. Following these decisions, our appeal bond was terminated and $37 million in escrowed royalties were returned to us on June 10, 2008. Initial summary judgment motions on invalidity of additional claims will be submitted December 1,

8

DIRECTV HOLDINGS LLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

2008, followed, if necessary, by further proceedings and a trial of remaining issues, which is presently scheduled for October 2009.

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 September 30, 2008, the net book value of in-orbit satellites was $1,735 million of which $1,530 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 September 30, 2008, included in "Accounts receivable, net" and "Other assets" in the Consolidated Balance Sheets is a receivable for $35 million related to this agreement.

Note 6: Related Party Transactions

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

The DIRECTV Group and affiliates

        We determine our income taxes based upon our tax sharing agreement with The DIRECTV Group, which generally provides that the current income tax liability or receivable be computed as if we were a separate taxpayer. Payments made to our Parent under this tax sharing arrangement were $564 million for the nine months ended September 30, 2008 and $605 million for the nine months ended September 30, 2007. We also receive an allocation of employee benefit expenses from The DIRECTV Group. We believe that our consolidated financial statements reflect our cost of doing business in accordance with SEC Staff Accounting Bulletin No. 55, "Allocation of Expenses and Related Disclosures in Financial Statements of Subsidiaries, Divisions or Lesser Business Components of Another Entity."

        During the nine months ended September 30, 2008, we paid $2,600 million in dividends to our Parent from available cash and cash equivalents. During the third quarter of 2007, we paid a $700 million dividend to our Parent from available cash and cash equivalents.

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 and its affiliates, including its equity method investees may be considered to be related party transactions as Liberty Media currently owns approximately 52% of our Parent's outstanding common stock. Our transactions with Liberty Media and its affiliates consist primarily of the purchase of programming.

9

DIRECTV HOLDINGS LLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

        In addition, John Malone, Chairman of the Board of Directors of our Parent and of Liberty Media, has an approximate 23% voting interest in Discovery Communications Inc., or Discovery Communications, and an approximate 34% 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 Parent's 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.

        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

        Companies in which we hold equity method investments are also considered related parties.

10

DIRECTV HOLDINGS LLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

        The following table summarizes sales to, and purchases from, related parties:

		Three Months Ended September 30,				Nine Months Ended September 30,
		2008		2007		2008		2007
		(Dollars in Millions)
Sales:
Liberty Media and affiliates		$	8	$	—	$	20	$	—
Discovery Communications, Liberty Global and affiliates			—		—		4		—
News Corporation and affiliates			—		4		2		13
	Total	$	8	$	4	$	26	$	13
Purchases:
Liberty Media and affiliates		$	81	$	—	$	183	$	—
Discovery Communications, Liberty Global and affiliates			50		—		115		—
News Corporation and affiliates			—		215		157		626
Other			9		6		27		17
	Total	$	140	$	221	$	482	$	643

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

	September 30, 2008		December 31, 2007
	(Dollars in Millions)
Accounts receivable	$	29	$	20
Accounts payable		174		270

        The accounts receivable and accounts payable balances as of September 30, 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.

Note 7: 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 our 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.

        We accounted for the 180 Connect acquisition using the purchase method of accounting, and began consolidating the results from the date of acquisition. The September 30, 2008 consolidated financial statements reflect the preliminary allocation of the $91 million net purchase price to assets

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

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 $141 million during the third quarter of 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			141
Total assets acquired		$	178
Total current liabilities		$	79
Other liabilities			8
Total liabilities assumed		$	87
	Net assets acquired	$	91

        The following selected unaudited pro forma information is being provided to present a summary of the combined results of us 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.

	Three Months Ended September 30,				Nine Months Ended September 30,
	2008		2007		2008		2007
	(Dollars in Millions)
Revenues	$	4,324	$	3,885	$	12,569	$	11,150
Net Income		266		288		958		1,011

         Other.    In August 2008, we paid $11 million in cash to purchase certain assets and we assumed certain liabilities of another home service provider. 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, resulting in an increase in goodwill of $15 million during the third quarter of 2008. We expect the recorded goodwill to be deductible for tax purposes. The purchase price allocation is expected to be completed during the first half of 2009.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 8: Condensed Consolidating Financial Statements

        The following presents the condensed consolidating statements of operations for the three and nine months ended September 30, 2008 and 2007, the condensed consolidating balance sheets as of September 30, 2008 and December 31, 2007, and the condensed consolidating statements of cash flows for the nine months ended September 30, 2008 and 2007 of DIRECTV Holdings together with DIRECTV Financing Co., Inc., or the Co-Issuers, and each of DIRECTV Holdings' material subsidiaries (other than DIRECTV Financing), or the Guarantor Subsidiaries, and the eliminations necessary to present DIRECTV Holdings' financial statements on a consolidated basis. These condensed consolidating financial statements should be read in conjunction with the accompanying consolidated financial statements of DIRECTV Holdings.

Condensed Consolidating Statement of Operations
For the Three Months Ended September 30, 2008

			Co-Issuers			Guarantor Subsidiaries			Eliminations			DIRECTV Holdings Consolidated
			(Dollars in Millions)
Revenues			$	90		$	4,324		$	(90	)	$	4,324
Operating costs and expenses
	Costs of revenues, exclusive of depreciation and amortization expense
		Broadcast programming and other		—			1,841			—			1,841
		Subscriber service expenses		—			296			—			296
		Broadcast operations expenses		—			71			—			71
	Selling, general and administrative expenses, exclusive of depreciation and amortization expense
		Subscriber acquisition costs		—			565			—			565
		Upgrade and retention costs		—			260			—			260
		General and administrative expenses		—			321			(90	)		231
	Depreciation and amortization expense			—			528			—			528
		Total operating costs and expenses		—			3,882			(90	)		3,792
Operating profit				90			442			—			532
Equity in income of consolidated subsidiaries				261			—			(261	)		—
Interest income				8			1			—			9
Interest expense				(90	)		(4	)		—			(94	)
Other, net				1			—			—			1
Income before income taxes				270			439			(261	)		448
Income tax expense				(4	)		(178	)		—			(182	)
Net income			$	266		$	261		$	(261	)	$	266

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Condensed Consolidating Statement of Operations
For the Three Months Ended September 30, 2007

			Co-Issuers			Guarantor Subsidiaries			Eliminations			DIRECTV Holdings Consolidated
			(Dollars in Millions)
Revenues			$	16		$	3,885		$	(16	)	$	3,885
Operating costs and expenses
	Costs of revenues, exclusive of depreciation and amortization expense
		Broadcast programming and other		—			1,657			—			1,657
		Subscriber service expenses		—			291			—			291
		Broadcast operations expenses		—			56			—			56
	Selling, general and administrative expenses, exclusive of depreciation and amortization expense
		Subscriber acquisition costs		—			498			—			498
		Upgrade and retention costs		—			268			—			268
		General and administrative expenses		—			215			(16	)		199
	Depreciation and amortization expense			—			378			—			378
		Total operating costs and expenses		—			3,363			(16	)		3,347
Operating profit				16			522			—			538
Equity in income of consolidated subsidiaries				312			—			(312	)		—
Interest income				16			—			—			16
Interest expense				(50	)		(6	)		—			(56	)
Other, net				—			1			—			1
Income before income taxes				294			517			(312	)		499
Income tax benefit (expense)				7			(205	)		—			(198	)
Net income			$	301		$	312		$	(312	)	$	301

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Condensed Consolidating Statement of Operations
For the Nine Months Ended September 30, 2008

			Co-Issuers			Guarantor Subsidiaries			Eliminations			DIRECTV Holdings Consolidated
			(Dollars in Millions)
Revenues			$	196		$	12,569		$	(196	)	$	12,569
Operating costs and expenses
	Costs of revenues, exclusive of depreciation and amortization expense
		Broadcast programming and other		—			5,216			—			5,216
		Subscriber service expenses		—			839			—			839
		Broadcast operations expenses		—			197			—			197
	Selling, general and administrative expenses, exclusive of depreciation and amortization expense
		Subscriber acquisition costs		—			1,602			—			1,602
		Upgrade and retention costs		—			724			—			724
		General and administrative expenses		—			852			(196	)		656
	Depreciation and amortization expense			—			1,493			—			1,493
		Total operating costs and expenses		—			10,923			(196	)		10,727
Operating profit				196			1,646			—			1,842
Equity in income of consolidated subsidiaries				989			—			(989	)		—
Interest income				30			1			—			31
Interest expense				(209	)		(13	)		—			(222	)
Other, net				1			1			—			2
Income before income taxes				1,007			1,635			(989	)		1,653
Income tax expense				(7	)		(646	)		—			(653	)
Net income			$	1,000		$	989		$	(989	)	$	1,000

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Condensed Consolidating Statement of Operations
For the Nine Months Ended September 30, 2007

			Co-Issuers			Guarantor Subsidiaries			Eliminations			DIRECTV Holdings Consolidated
			(Dollars in Millions)
Revenues			$	16		$	11,150		$	(16	)	$	11,150
Operating costs and expenses
	Costs of revenues, exclusive of depreciation and amortization expense
		Broadcast programming and other		—			4,653			—			4,653
		Subscriber service expenses		—			852			—			852
		Broadcast operations expenses		—			161			—			161
	Selling, general and administrative expenses, exclusive of depreciation and amortization expense
		Subscriber acquisition costs		—			1,377			—			1,377
		Upgrade and retention costs		—			691			—			691
		General and administrative expenses		—			585			(16	)		569
	Depreciation and amortization expense			—			1,021			—			1,021
		Total operating costs and expenses		—			9,340			(16	)		9,324
Operating profit				16			1,810			—			1,826
Equity in income of consolidated subsidiaries				1,083			—			(1,083	)		—
Interest income				60			—			—			60
Interest expense				(143	)		(19	)		—			(162	)
Income before income taxes				1,016			1,791			(1,083	)		1,724
Income tax benefit (expense)				26			(708	)		—			(682	)
Net income			$	1,042		$	1,083		$	(1,083	)	$	1,042

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Condensed Consolidating Balance Sheet
As of September 30, 2008

			Co-Issuers		Guarantor Subsidiaries		Eliminations			DIRECTV Holdings Consolidated
			(Dollars in Millions)
ASSETS
Total current assets			$	1,587	$	1,762	$	(64	)	$	3,285
Satellites, net				—		2,011		—			2,011
Property and equipment, net				—		3,292		—			3,292
Goodwill				1,828		1,360		—			3,188
Intangible assets, net				—		959		—			959
Other assets				7,614		1,303		(8,736	)		181
Total assets			$	11,029	$	10,687	$	(8,800	)	$	12,916
LIABILITIES AND OWNER'S EQUITY
Total current liabilities			$	160	$	2,657	$	(64	)	$	2,753
Long-term debt				5,755		—		—			5,755
Deferred income taxes				—		614		(215	)		399
Other liabilities and deferred credits				1,930		825		(1,930	)		825
Owner's equity
	Capital stock and additional paid-in capital			2,826		4,464		(4,464	)		2,826
	Retained earnings			358		2,127		(2,127	)		358
		Total owner's equity		3,184		6,591		(6,591	)		3,184
Total liabilities and owner's equity			$	11,029	$	10,687	$	(8,800	)	$	12,916

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DIRECTV HOLDINGS LLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Condensed Consolidating Balance Sheet
As of December 31, 2007

			Co-Issuers		Guarantor Subsidiaries		Eliminations			DIRECTV Holdings Consolidated
			(Dollars in Millions)
ASSETS
Total current assets			$	865	$	1,763	$	(81	)	$	2,547
Satellites, net				—		2,030		—			2,030
Property and equipment, net				—		3,230		—			3,230
Goodwill				1,828		1,204		—			3,032
Intangible assets, net				—		1,223		—			1,223
Other assets				6,126		490		(6,381	)		235
Total assets			$	8,819	$	9,940	$	(6,462	)	$	12,297
LIABILITIES AND OWNER'S EQUITY
Total current liabilities			$	132	$	2,865	$	(81	)	$	2,916
Long-term debt				3,347		—		—			3,347
Deferred income taxes				—		559		(223	)		336
Other liabilities and deferred credits				600		958		(600	)		958
Owner's equity
	Capital stock and additional paid-in capital			2,782		4,420		(4,420	)		2,782
	Retained earnings			1,958		1,138		(1,138	)		1,958
		Total owner's equity		4,740		5,558		(5,558	)		4,740
Total liabilities and owner's equity			$	8,819	$	9,940	$	(6,462	)	$	12,297

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DIRECTV HOLDINGS LLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Condensed Consolidating Statement of Cash Flows
For the Nine Months Ended September 30, 2008

			Co-Issuers			Guarantor Subsidiaries			DIRECTV Holdings Consolidated
			(Dollars in Millions)
Cash flows from operating activities
	Net cash provided by operating activities		$	912		$	1,418		$	2,330
Cash flows from investing activities
	Cash paid for property and equipment			—			(343	)		(343	)
	Cash paid for subscriber leased equipment—subscriber acquisition			—			(432	)		(432	)
	Cash paid for subscriber leased equipment—upgrade and retention			—			(373	)		(373	)
	Cash paid for satellites			—			(92	)		(92	)
	Other			—			(93	)		(93	)
		Net cash used in investing activities		—			(1,333	)		(1,333	)
Cash flows from financing activities
	Cash proceeds from financing transactions			2,490			—			2,490
	Repayment of long-term debt			(35	)		—			(35	)
	Repayment of other long-term obligations			—			(79	)		(79	)
	Cash dividends to Parent			(2,600	)		—			(2,600	)
	Excess tax benefit from share-based compensation			—			7			7
	Debt issuance costs			(19	)		—			(19	)
		Net cash used in financing activities		(164	)		(72	)		(236	)
Net increase in cash and cash equivalents				748			13			761
Cash and cash equivalents at beginning of the period				790			12			802
Cash and cash equivalents at the end of the period			$	1,538		$	25		$	1,563

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Concluded)

Condensed Consolidating Statement of Cash Flows
For the Nine Months Ended September 30, 2007

			Co-Issuers			Guarantor Subsidiaries			DIRECTV Holdings Consolidated
			(Dollars in Millions)
Cash flows from operating activities
	Net cash provided by operating activities		$	189		$	1,843		$	2,032
Cash flows from investing activities
	Cash paid for property and equipment			—			(476	)		(476	)
	Cash paid for subscriber leased equipment—subscriber acquisition			—			(580	)		(580	)
	Cash paid for subscriber leased equipment—upgrade and retention			—			(579	)		(579	)
	Cash paid for satellites			—			(149	)		(149	)
	Other			—			(3	)		(3	)
		Net cash used in investing activities		—			(1,787	)		(1,787	)
Cash flows from financing activities
	Repayment of long-term debt			(8	)		—			(8	)
	Repayment of other long-term obligations			—			(54	)		(54	)
	Cash dividends to Parent			(700	)		—			(700	)
	Excess tax benefit from share-based compensation			—			4			4
		Net cash used in financing activities		(708	)		(50	)		(758	)
Net (decrease) increase in cash and cash equivalents				(519	)		6			(513	)
Cash and cash equivalents at beginning of the period				1,354			2			1,356
Cash and cash equivalents at the end of the period			$	835		$	8		$	843

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ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

        The following management's discussion and analysis should be read in conjunction with our management's discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the year ended December 31, 2007 filed with the SEC on February 27, 2008, our Quarterly Reports on Form 10-Q for the quarter ended March 31, 2008 filed with the SEC on May 7, 2008, and for the quarter ended June 30, 2008 filed with the SEC on August 7, 2008, and all of our other filings, including Current Reports on Form 8-K, filed with the SEC after such date and through the date of this report.

        This Quarterly Report on Form 10-Q may contain certain statements that we believe are, or may be considered to be, "forward-looking statements" within the meaning of various provisions of the Securities Act of 1933 and of the Securities Exchange Act of 1934. These forward-looking statements generally can be identified by use of statements that include phrases such as we "believe," "estimate," "expect," "anticipate," "intend," "plan," "foresee," "project" or other similar words or phrases. Similarly, statements that describe our objectives, plans or goals also are forward-looking statements. All of these forward-looking statements are subject to certain risks and uncertainties that could cause our actual results to differ materially from historical results or from those expressed or implied by the relevant forward-looking statement. We discuss these risks and uncertainties in detail in Part I, Item 1A of our 2007 Form 10-K.

BUSINESS OVERVIEW

        We are a wholly-owned subsidiary of The DIRECTV Group and our subsidiaries include DIRECTV Enterprises, LLC and its wholly-owned subsidiaries and DIRECTV Financing Co., Inc. We acquire, promote, sell and distribute digital entertainment programming via satellite to residential and commercial subscribers. We are the largest provider of direct-to-home digital television services and the second largest provider in the multi-channel video programming distribution industry in the United States. As of September 30, 2008, we had approximately 17.3 million subscribers.

        We currently broadcast from a fleet of eleven geosynchronous satellites, including ten owned satellites and one leased satellite. DIRECTV 12 is under construction and is expected to be ready for launch in the second half of 2009.

SIGNIFICANT TRANSACTIONS

Financing Transactions

        In May 2008, we issued $1.5 billion in senior notes and amended our senior secured credit facility to include a new $1.0 billion Term Loan C. The senior notes bear interest at a rate of 7.625% and the principal balance is due in May 2016. The Term Loan C currently bears interest at a weighted average rate of 5.60% and was issued at a 1% discount. Principal payments on the Term Loan C began on September 30, 2008. The principal is payable in installments with the final installment due in April 2013.

Acquisition

        On July 8, 2008, we acquired 100% of 180 Connect'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

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us with control over a significant portion of our 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.

LEASE PROGRAM

        The following table sets forth the amount of set-top receivers we capitalized, and depreciation expense we recorded under the lease program implemented in 2006 for each of the periods presented:

	Three Months Ended September 30,				Nine Months Ended September 30,
Capitalized subscriber leased equipment:	2008		2007		2008		2007
	(Dollars in Millions)
Subscriber leased equipment—subscriber acquisitions	$	151	$	220	$	432	$	580
Subscriber leased equipment—upgrade and retention		128		197		373		579
Total subscriber leased equipment capitalized	$	279	$	417	$	805	$	1,159
Depreciation expense—subscriber leased equipment	$	287	$	177	$	789	$	434

KEY TERMINOLOGY

        The following key terminology is used in management's discussion and analysis of financial condition and results of operations:

         Revenues.    We earn revenues mostly from monthly fees we charge subscribers for subscriptions to basic and premium channel programming, HD programming and access fees, pay-per-view programming, and seasonal and live sporting events. We also earn revenues from monthly fees that we charge subscribers with multiple non-leased set-top receivers (which we refer to as mirroring fees), monthly fees we charge subscribers for leased set-top receivers, monthly fees we charge subscribers for digital video recorder, or DVR, service, hardware revenues from subscribers who lease or purchase set-top receivers from us, our published programming guide, warranty service fees and advertising services.

         Broadcast Programming and Other.    These costs primarily include license fees for subscription service programming, pay-per-view programming, live sports and other events. Other costs include expenses associated with the publication and distribution of our programming guide, continuing service fees paid to third parties for active subscribers, warranty service costs and production costs for on-air advertisements we sell to third parties.

         Subscriber Service Expenses.    Subscriber service expenses include the costs of customer call centers, billing, remittance processing and certain home services expenses, such as in-home repair costs.

         Broadcast Operations Expenses.    These expenses include broadcast center operating costs, signal transmission expenses (including costs of collecting signals for our local channel offerings), and costs of monitoring, maintaining and insuring our satellites. Also included are engineering expenses associated with deterring theft of our signal.

         Subscriber Acquisition Costs.    These costs include the cost of set-top receivers and other equipment, commissions we pay to national retailers, independent satellite television retailers, dealers, regional Bell operating companies, and the cost of installation, advertising, marketing and customer call center expenses associated with the acquisition of new subscribers. Set-top receivers leased to new subscribers are capitalized in "Property and equipment, net" in the Consolidated Balance Sheets and

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depreciated over their useful lives. The amount of set-top receivers capitalized each period for subscriber acquisitions is included in "Cash paid for subscriber leased equipment-subscriber acquisitions" in the Consolidated Statements of Cash Flows.

         Upgrade and Retention Costs.    The majority of upgrade and retention costs are associated with upgrade efforts for existing subscribers that we believe will result in higher average monthly revenue per subscriber, or ARPU, and lower churn. Our upgrade efforts include subscriber equipment upgrade programs for DVR, HD and HD DVR receivers and local channels, our multiple set-top receiver offer and similar initiatives. Retention costs also include the costs of installing and providing hardware under our movers program for subscribers relocating to a new residence. Set-top receivers leased to existing subscribers under upgrade and retention programs are capitalized in "Property and equipment, net" in the Consolidated Balance Sheets and depreciated over their useful lives. The amount of set-top receivers capitalized each period for upgrade and retention programs is included in "Cash paid for subscriber leased equipment-upgrade and retention" in the Consolidated Statements of Cash Flows.

         General and Administrative Expenses.    General and administrative expenses include departmental costs for legal, administrative services, finance, marketing and information technology. These costs also include expenses for bad debt and other operating expenses, such as legal settlements, and gains or losses from the sale or disposal of fixed assets.

         Average Monthly Revenue Per Subscriber.    We calculate ARPU by dividing average monthly revenues for the period (total revenues during the period divided by the number of months in the period) by average subscribers for the period. We calculate average subscribers for the period by adding the number of subscribers as of the beginning of the period and for each quarter end in the current year or period and dividing by the sum of the number of quarters in the period plus one.

         Average Monthly Subscriber Churn.    Average monthly subscriber churn represents the number of subscribers whose service is disconnected, expressed as a percentage of the average total number of subscribers. We calculate average monthly subscriber churn by dividing the average monthly number of disconnected subscribers for the period (total subscribers disconnected, net of reconnects, during the period divided by the number of months in the period) by average subscribers for the period.

         Subscriber Count.    The total number of subscribers represents the total number of subscribers actively subscribing to our service, including seasonal subscribers, subscribers who are in the process of relocating and commercial equivalent viewing units. In March 2008, we implemented a change in our commercial pricing and packaging to increase our competitiveness. As a result, during the first quarter of 2008, we made a one-time downward adjustment to the subscriber count of approximately 71,000 subscribers related to commercial equivalent viewing units.

         SAC.    We calculate SAC, which represents total subscriber acquisition costs stated on a per subscriber basis, by dividing total subscriber acquisition costs for the period by the number of gross new subscribers acquired during the period. We calculate total subscriber acquisition costs for the period by adding together "Subscriber acquisition costs" expensed during the period and the amount of cash paid for equipment leased to new subscribers during the period.

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Results of Operations

        The following table sets forth our unaudited consolidated statements of operations and certain other operating data:

Three Months Ended September 30, 2008 Compared with the Three Months Ended September 30, 2007

			Three Months Ended September 30,						Change
			2008			2007			$			%
			(Dollars in Millions)
Revenues			$	4,324		$	3,885		$	439			11.3	%
Operating costs and expenses
	Costs of revenues, exclusive of depreciation and amortization expense
		Broadcast programming and other		1,841			1,657			184			11.1	%
		Subscriber service expenses		296			291			5			1.7	%
		Broadcast operations expenses		71			56			15			26.8	%
	Selling, general and administrative expenses, exclusive of depreciation and amortization expense
		Subscriber acquisition costs		565			498			67			13.5	%
		Upgrade and retention costs		260			268			(8	)		(3.0	)%
		General and administrative expenses		231			199			32			16.1	%
	Depreciation and amortization expense			528			378			150			39.7	%
		Total operating costs and expenses		3,792			3,347			445			13.3	%
Operating profit				532			538			(6	)		(1.1	)%
Interest income				9			16			(7	)		(43.8	)%
Interest expense				(94	)		(56	)		(38	)		67.9	%
Other, net				1			1			—			NM	*
Income before income taxes				448			499			(51	)		(10.2	)%
Income tax expense				(182	)		(198	)		16			(8.1	)%
Net income			$	266		$	301		$	(35	)		(11.6	)%
Other Data:
Operating profit before depreciation and amortization(1)
Operating profit			$	532		$	538		$	(6	)		(1.1	)%
Add: Depreciation and amortization expense				528			378			150			39.7	%
Operating profit before depreciation and amortization			$	1,060		$	916		$	144			15.7	%
Operating profit before depreciation and amortization—margin(1)				24.5	%		23.6	%		—			3.8	%
Cash Flow Information
Net cash provided by operating activities			$	779		$	642		$	137			21.3	%
Net cash used in investing activities				(515	)		(611	)		96			(15.7	)%
Net cash used in financing activities				(38	)		(722	)		684			(94.7	)%

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		Three Months Ended September 30,						Change
		2008			2007			$			%
		(Dollars in Millions, Except Per Subscriber Amounts)
Free cash flow(2)
Net cash provided by operating activities		$	779		$	642		$	137			21.3	%
Less: Cash paid for property and equipment			(124	)		(154	)		30			(19.5	)%
	Cash paid for subscriber leased equipment—subscriber acquisitions		(151	)		(220	)		69			(31.4	)%
	Cash paid for subscriber leased equipment—upgrade and retention		(128	)		(197	)		69			(35.0	)%
	Cash paid for satellites		(15	)		(37	)		22			(59.5	)%
Free cash flow		$	361		$	34		$	327			961.8	%
Subscriber data
Average monthly revenue per subscriber (ARPU)		$	83.59		$	78.79		$	4.80			6.1	%
Average monthly subscriber churn %			1.64	%		1.61	%		—			1.9	%
Average subscriber acquisition costs—per subscriber (SAC)		$	715		$	696		$	19			2.7	%
Gross subscriber additions (000's)			1,002			1,032			(30	)		(2.9	)%
Subscriber disconnections (000's)			846			792			54			6.8	%
Net subscriber additions (000's)			156			240			(84	)		(35.0	)%
Total number of subscribers (000's)			17,320			16,556			764			4.6	%

(1)

Operating profit before depreciation and amortization, which is a financial measure that is not determined in accordance with accounting principles generally accepted in the United States of America, or GAAP, can be calculated by adding amounts under the caption "Depreciation and amortization expense" to "Operating profit." 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 The DIRECTV Group use operating profit 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 acquired intangible assets resulting from prior business acquisitions. To compensate for the exclusion of depreciation and amortization expense from operating profit, our management and The DIRECTV Group separately measure and budget for capital expenditures and business acquisitions.

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 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 expense. 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.

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Operating profit before depreciation and amortization margin is calculated by dividing operating profit before depreciation and amortization by revenues.

(2)

Free cash flow, which is a financial measure that is not determined in accordance with GAAP, can be calculated by deducting amounts under the captions "Cash paid for property and equipment," "Cash paid for subscriber leased equipment—subscriber acquisitions," "Cash paid for subscriber leased equipment—upgrade and retention" and "Cash paid for satellites" from "Net cash provided by operating activities" from the Consolidated Statements of Cash Flows. This financial measure should be used in conjunction with other GAAP financial measures and is not presented as an alternative measure of cash flows from operating activities, as determined in accordance with GAAP. Our management and The DIRECTV Group use free cash flow to evaluate the cash generated by our current subscriber base, net of capital expenditures, for the purpose of allocating resources to activities such as adding new subscribers, retaining and upgrading existing subscribers, for additional capital expenditures and other capital investments or transactions and as a measure of performance for incentive compensation purposes. We believe this measure is useful to investors, along with other GAAP measures (such as cash flows from operating and investing activities), to compare our operating performance to other communications, entertainment and media companies. We believe that investors also use current and projected free cash flow to determine the ability of revenues from our current and projected subscriber base to fund required and discretionary spending and to help determine our financial value.

*

Percentage not meaningful.

         Subscribers.    In the third quarter of 2008, gross subscriber additions decreased compared to the third quarter of 2007 primarily due to the termination of the previous AT&T distribution agreement on April 1, 2008, partially offset by increased sales in our retail and direct sales channels. The increase in churn was primarily due to a more challenging economic and competitive environment. Net subscriber additions decreased due to lower gross subscriber additions and a larger number of subscriber disconnections.

         Revenues.    Our revenues increased as of result of higher ARPU and the larger subscriber base. The increase in ARPU resulted primarily from price increases on programming packages and higher HD and DVR service fees.

         Operating profit before depreciation and amortization.    The improvement of operating profit before depreciation and amortization was primarily due to the gross profit generated from the higher revenues, partially offset by higher subscriber acquisition and higher general and administrative costs.

        Broadcast programming and other costs increased due to annual program supplier rate increases, the larger number of subscribers in the third quarter of 2008 as compared to the third quarter of 2007 and new channel launches. Broadcast operations expense increased in the third quarter of 2008 as compared to the third quarter 2007 due primarily to costs to support new HD local channel markets and an increase in labor expenses to support advanced services, HD enhancements and video-on-demand.

        Subscriber acquisition costs increased due to higher direct sales and national marketing costs, higher dealer incentives, and increased installation costs driven by increasing subscriber demand for advanced services. SAC per subscriber, which includes the cost of capitalized set-top receivers, increased due to higher direct sales and national marketing costs, higher dealer incentives and an increase in installation costs due to an increase in subscribers taking advanced services, partially offset by lower set-top receiver manufacturing costs.

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        General and administrative expenses increased in the third quarter of 2008 primarily due to a charge associated with a legal settlement, an increase in labor and benefit costs and an increase in bad debt expense associated with higher revenues in 2008.

         Operating profit.    The decrease in operating profit was primarily due to higher operating profit before depreciation and amortization, more than offset by higher depreciation and amortization expense in the third quarter of 2008 resulting from the capitalization of set-top receivers under the lease program.

         Interest income and expense.    The decrease in interest income was due to lower average interest rates, partially offset by our higher average cash balance. The increase in interest expense was from an increase in the average debt balance compared to 2007 and lower capitalization of interest cost in 2008. We capitalized $4 million of interest costs in the third quarter of 2008 and $11 million in the third quarter of 2007. The reduction in the capitalization of interest costs was due to the successful completion and launch of the DIRECTV 10 and DIRECTV 11 satellites.

         Income tax expense.    The $16 million decrease in income tax expense was primarily due to the lower income before income taxes.

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Nine Months Ended September 30, 2008 Compared with the Nine Months Ended September 30, 2007

			Nine Months Ended September 30,						Change
			2008			2007			$			%
			(Dollars in Millions)
Revenues			$	12,569		$	11,150		$	1,419			12.7	%
Operating costs and expenses
	Costs of revenues, exclusive of depreciation and amortization expense
		Broadcast programming and other		5,216			4,653			563			12.1	%
		Subscriber service expenses		839			852			(13	)		(1.5	)%
		Broadcast operations expenses		197			161			36			22.4	%
	Selling, general and administrative expenses, exclusive of depreciation and amortization expense
		Subscriber acquisition costs		1,602			1,377			225			16.3	%
		Upgrade and retention costs		724			691			33			4.8	%
		General and administrative expenses		656			569			87			15.3	%
	Depreciation and amortization expense			1,493			1,021			472			46.2	%
		Total operating costs and expenses		10,727			9,324			1,403			15.0	%
Operating profit				1,842			1,826			16			0.9	%
Interest income				31			60			(29	)		(48.3	)%
Interest expense				(222	)		(162	)		(60	)		37.0	%
Other, net				2			—			2			NM	*
Income before income taxes				1,653			1,724			(71	)		(4.1	)%
Income tax expense				(653	)		(682	)		29			(4.3	)%
Net income			$	1,000		$	1,042		$	(42	)		(0.4	)%
Other Data:
Operating profit before depreciation and amortization(1)
Operating profit			$	1,842		$	1,826		$	16			0.9	%
Add: Depreciation and amortization expense				1,493			1,021			472			46.2	%
Operating profit before depreciation and amortization			$	3,335		$	2,847		$	488			17.1	%
Operating profit before depreciation and amortization—margin(1)				26.5	%		25.5	%		—			3.9	%
Cash flow information
Net cash provided by operating activities			$	2,330		$	2,032		$	298			14.7	%
Net cash used in investing activities				(1,333	)		(1,787	)		454			(25.4	)%
Net cash used in financing activities				(236	)		(758	)		522			(68.9	)%

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		Nine Months Ended September 30,						Change
		2008			2007			$			%
		(Dollars in Millions, Except Per Subscriber Amounts)
Free cash flow(2)
Net cash provided by operating activities		$	2,330			2,032		$	298			14.7	%
Less: Cash paid for property and equipment			(343	)		(476	)		133			(27.9	)%
	Cash paid for subscriber leased equipment—subscriber acquisitions		(432	)		(580	)		148			(25.5	)%
	Cash paid for subscriber leased equipment—upgrade and retention		(373	)		(579	)		206			(35.6	)%
	Cash paid for satellites		(92	)		(149	)		57			(38.3	)%
Free cash flow		$	1,090		$	248		$	842			339.5	%
Subscriber data
Average monthly revenue per subscriber (ARPU)		$	81.73		$	76.22		$	5.51			7.2	%
Average monthly subscriber churn %			1.50	%		1.54	%		—			(2.6	)%
Average subscriber acquisition costs—per subscriber (SAC)		$	711		$	684		$	27			3.9	%
Gross subscriber additions (000's)			2,860			2,861			(1	)		NM	*
Subscriber disconnections (000's)			2,300			2,258			42			1.9	%
Net subscriber additions (000's)			560			603			(43	)		(7.1	)%
Total number of subscribers (000's)(3)			17,320			16,556			764			4.6	%

(3)

As discussed above in "Key Terminology," during the nine months ended September 30, 2008, we had a one-time downward adjustment to our subscriber count of approximately 71,000 subscribers related to commercial equivalent viewing units. This adjustment did not affect our revenue, operating profit, cash flows, net subscriber additions or average monthly subscriber churn.

         Subscribers.    Gross subscriber additions in 2008 were relatively unchanged compared to 2007 due to higher demand for HD and DVR services and increased sales in our direct sales and retail channels, offset by the termination of the previous AT&T distribution agreement on April 1, 2008. Average monthly subscriber churn decreased primarily due to an increase in the number of subscribers with advanced products, as well as the effect of more stringent credit policies. Net subscriber additions decreased due to a larger number of subscriber disconnections.

         Revenues.    DIRECTV U.S.' revenues increased as of result of higher ARPU and the larger subscriber base. The increase in ARPU resulted primarily from annual price increases on programming packages, an increase in HD and DVR service fees, and an increase in lease fees due to a higher average number of receivers per subscriber.

         Operating profit before depreciation and amortization.    The improvement of operating profit before depreciation and amortization was primarily due to the gross profit generated from the higher revenues, partially offset by higher subscriber acquisition and upgrade and retention costs for the increased number of new and existing customers adding HD and DVR services, and increased general and administrative costs.

        Broadcast programming and other costs increased due to annual program supplier rate increases, the larger number of subscribers in 2008 and new channel launches. Subscriber service expenses decreased in 2008 primarily due to improved performance at customer call centers. Broadcast operations expenses increased primarily due to costs to support new HD local channel markets, and an increase in labor expenses to support advanced services, HD enhancements and video-on-demand.

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        Subscriber acquisition costs increased due to higher direct sales and national marketing costs, higher dealer incentives and increased installation costs driven by increasing subscriber demand for advanced services. SAC per subscriber, which includes the cost of capitalized set-top receivers, increased due to higher direct sales and national marketing costs, higher dealer incentives and increased installation costs driven by increasing subscriber demand for advanced services, partially offset by lower set-top receiver manufacturing costs.

        Upgrade and retention costs increased in 2008 due to an increase in upgrades to advanced services and higher upgrade and retention marketing costs.

        General and administrative expenses increased in 2008 primarily due to a $25 million one-time gain recognized in the second quarter of 2007 related to hurricane insurance recoveries, a $14 million charge for the write-off of accounts receivable for equipment and other costs incurred to effect the orderly transition of services from one of our home service providers that ceased operations, a charge associated with a legal settlement and an increase in labor and benefit costs.

         Operating profit.    The increase in operating profit was primarily due to higher operating profit before depreciation and amortization, partially offset by higher depreciation and amortization expense in 2008 resulting from the capitalization of set-top receivers under the lease program.

         Interest income and expense.    The decrease in interest income was due to lower average interest rates. The increase in interest expense was from an increase in the average debt balance compared to 2007 and lower capitalization of interest cost in 2008. We capitalized $13 million of interest costs in 2008 and $40 million in 2007. The reduction in the capitalization of interest costs was due to the successful completion and launch of DIRECTV 10 and DIRECTV 11 satellites.

         Income tax expense.    The $29 million decrease in income tax expense was primarily due to the lower income before income taxes.

Liquidity and Capital Resources

        At September 30, 2008, we had cash and cash equivalents of $1,563 million compared to $802 million at December 31, 2007. The $761 million increase resulted primarily from $2,471 million of net cash proceeds from the issuance of senior notes and borrowings under our senior secured credit facility which were completed in May 2008 as described in Note 4 of the Notes to the Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report and $2,330 million of cash provided by operating activities, partially offset by $1,240 million of cash paid for the acquisition of satellites, property and equipment and subscriber leased equipment, $2,600 million of cash dividends paid to our Parent and $97 million of cash paid for investments.

        As a measure of liquidity, our current ratio (ratio of current assets to current liabilities) was 1.19 at September 30, 2008 compared to 0.87 at December 31, 2007. The increase in our current ratio during the nine months ended September 30, 2008 was primarily due to the change in our cash and cash equivalents discussed above and a decrease in accounts payable and accrued liabilities, partially offset by lower accounts receivable.

        As of September 30, 2008, we had the ability to borrow up to $500 million under our existing credit facility, which is available until 2011. We are subject to restrictive covenants under the credit facility. These covenants limit our ability and our respective subsidiaries to, among other things, make restricted payments, including dividends, loans or advances to our Parent.

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        We expect to fund our cash requirements and our existing business plan using our available cash balances, and cash provided by operations. Also, we have received capital contributions and have borrowed amounts from our Parent in the past to fund certain transactions. We may also provide dividends to our Parent or fund other cash requirements, including additional share repurchase programs or other distributions to its stockholders, or to fund strategic investment opportunities should they arise. We may use available cash and cash equivalents, cash from operations, or incur additional borrowings, which may include borrowings under our $500 million revolving credit facility, to fund such dividends.

        Several factors may affect our ability to fund our operations and commitments that we discuss in "Contingencies" below. In addition, our future cash flows may be reduced if we experience, among other things, significantly higher subscriber additions than planned, increased subscriber churn or upgrade and retention costs, higher than planned capital expenditures for satellites and broadcast equipment, satellite anomalies or signal theft or if we are required to make a prepayment on our term loans under our senior secured credit facility. Additionally, our ability to borrow under the senior secured credit facility is contingent upon our meeting financial and other covenants associated with our credit facility as more fully described in Note 4 of the Notes to the Consolidated Financial Statements in Item 1, Part I of this Quarterly Report and in Note 7 to the Notes to the Consolidated Financial Statements in Item 8, Part II of our 2007 Form 10-K.

Borrowings

        At September 30, 2008, we had $5,850 million in total outstanding borrowings, bearing a weighted average interest rate of 6.52%. Our outstanding borrowings primarily consist of notes payable and amounts borrowed under a senior secured credit facility as more fully described in Note 4 of the Notes to the Consolidated Financial Statements in Item 1, Part I of this Quarterly Report and in Note 7 to the Notes to the Consolidated Financial Statements in Item 8, Part II of our 2007 Form 10-K.

        Our notes payable and senior secured credit facility mature as follows: $17 million in the remainder of 2008, $108 million in 2009, $308 million in 2010, $108 million in 2011, $20 million in 2012, and $5,296 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 that we are required to make at each year end under the credit agreement. We were not required to make a prepayment for the year ended December 31, 2007 and we do not currently expect to be required to make a prepayment for the year ending December 31, 2008.

         Covenants and Restrictions.    The senior secured credit facility requires us to comply with certain financial covenants. The senior notes and the senior secured credit facility also include covenants that restrict our ability to, among other things, (i) incur additional indebtedness, (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 our 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 we fail to comply with these covenants, all or a portion of our borrowings under the senior notes and senior secured credit facility could become immediately payable and our revolving credit facility could be terminated. At September 30, 2008, we were 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 Parent's outstanding common stock. There was no ratings decline for our notes associated with that event, and we were not required either to offer to redeem the senior

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notes pursuant to their respective indentures or to prepay any of the borrowings under the senior secured credit facility.

        Debt ratings by the various rating agencies reflect each agency's opinion of the ability of issuers to repay debt obligations as they come due and the expected estimated loss given a default. In general, lower ratings result in higher borrowing costs. Please refer to our 2007 Form 10-K for discussion of Moody's Investors Service and Standard & Poor's Rating Service ratings range.

        Currently, we have the following security ratings:

	Senior Secured	Senior Unsecured	Corporate	Outlook
Standard & Poor's	BBB-	BB	BB	Stable
Moody's	Baa3	Ba3	Ba2	Stable

CONTRACTUAL OBLIGATIONS, OFF-BALANCE SHEET ARRANGEMENTS AND CONTINGENCIES

        The following table sets forth our contractual obligations as of September 30, 2008, including the future periods in which payments are expected. Additional details regarding these obligations are provided in the Notes to the Consolidated Financial Statements in Part I, Item 1 referenced in the table below and the Notes to the Consolidated Financial Statements in Part II, Item 8 in our Form 10-K for the year ended December 31, 2007.

	Payments due by period
Contractual Obligations	Total		2008		2009-2010		2011-2012		2013 and thereafter
	(Dollars in Millions)
Long-term debt obligations (Note 4)(a)	$	8,207	$	138	$	1,169	$	840	$	6,060
Purchase obligations(b)		3,858		329		2,408		943		178
Operating leases obligations(c)		217		9		62		52		94
Other long-term liabilities reflected on the Consolidated Balance Sheets under GAAP(d)(e)		260		21		175		51		13
Total	$	12,542	$	497	$	3,814	$	1,886	$	6,345

(a)

Long-term debt obligations include interest calculated based on the rates in effect at September 30, 2008, however, the obligations do not reflect potential prepayments that may be required under our senior secured credit facility, if any, or permitted under our indentures.

(b)

Purchase obligations consist of broadcast programming commitments, satellite construction and launch contracts and service contract commitments. Broadcast programming commitments include guaranteed minimum contractual commitments that are typically based on a minimum number of required subscribers subscribing to the related programming. Actual payments may exceed the minimum payment requirements if the actual number of subscribers subscribing to the related programming exceeds the minimum amounts. Service contract commitments include minimum commitments for the purchase of services that have been outsourced to third parties, such as billing services, telemetry, tracking and control services and broadcast center services. In most cases, actual payments, which are typically based on volume, usually exceed these minimum amounts.

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(c)

Certain of our operating leases contain escalation clauses and renewal or purchase options, which we do not consider in the amounts disclosed.

(d)

Other long-term liabilities consist of the amounts we owe to the National Rural Telecommunications Cooperative, or NRTC, for the purchase of distribution rights and to the NRTC members that elected the long-term payment option resulting from the NRTC acquisition transactions we consummated in 2004, capital lease obligations, including interest and satellite contracts.

(e)

Payments due by period for other long-term liabilities reflected on the Consolidated Balance Sheet under GAAP do not include payments that could be made related to our unrecognized tax benefits liability, which amounted to $163 million as of September 30, 2008. The timing and amount of any future payments is not reasonably estimable, as such payments are dependent on the completion and resolution of examinations with tax authorities. We do not expect a significant payment related to these obligations within the next twelve months.

CONTINGENCIES

        For a discussion of "Contingencies," see Part I, Item 1, Note 5 of the Notes to the Consolidated Financial Statements of this Quarterly Report, which we incorporate herein by reference.

CERTAIN RELATIONSHIPS AND RELATED-PARTY TRANSACTIONS

        For a discussion of "Certain Relationships and Related-Party Transactions," see Part I, Item 1, Note 6 of the Notes to the Consolidated Financial Statements of this Quarterly Report, which we incorporate herein by reference.

ACCOUNTING CHANGES

        For a discussion of "Accounting Changes and New Standards," see Part I, Item 1, Note 2 of the Notes to the Consolidated Financial Statements of this Quarterly Report, which we incorporate herein by reference.

*    *    *

ITEM 4T.    CONTROLS AND PROCEDURES

        We carried out an evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q under the supervision and with the participation of management, including our principal executive officer and our principal financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act). Based on the evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of September 30, 2008.

        There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during our fiscal quarter ended September 30, 2008, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

*    *    *

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PART II—OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS

(a)    Material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which we became or were a party during the quarter ended September 30, 2008 or subsequent thereto, but before the filing of this report, are summarized below:

         Intellectual Property Litigation.    We are a defendant in several unrelated lawsuits claiming infringement of various patents relating to various aspects of our businesses. In certain of these cases other industry participants are also defendants, and also in certain of these cases we expect that any potential liability would be the responsibility of our equipment vendors pursuant to applicable contractual indemnification provisions. To the extent that the allegations in these lawsuits can be analyzed by us at this stage of their proceedings, we believe the claims are without merit and intend to defend the actions vigorously. The final disposition of these claims is not expected to have a material adverse effect on our consolidated financial position, but could possibly be material to our consolidated results of operations of any one period. Further, no assurance can be given that any adverse outcome would not be material to our consolidated financial position.

         Finisar Corporation.    As previously reported, we filed a notice of appeal to the Court of Appeals for the Federal Circuit on October 5, 2006 from a jury determination that The DIRECTV Group, Inc. and certain of its subsidiaries willfully infringed a patent owned by Finisar Corporation and an award by the jury of 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 to Finisar. 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 vacated (set aside) the verdict of infringement, and sent the case back to the district court for further proceedings and possible retrial on a limited number of claims. The Court of Appeals ruled that the lower court had used erroneous interpretations of certain important terms in the patent claims. Thus, the district court must now determine whether there is any infringement using the correct interpretations, which are the ones we originally suggested. Regarding our defenses of invalidity, the Court of Appeals found that one of the principal independent claims of the patent is clearly anticipated by the prior art we presented. The Court of Appeals then remanded the question of validity for the remaining claims back to the district court for further consideration in view of this invalidity ruling. The Court of Appeals also reversed the verdict of willful infringement, and affirmed earlier rulings of the district court that held several additional claims to be invalid. Following these decisions, our appeal bond was terminated and $37 million in escrowed royalties were returned to us on June 10, 2008. Initial summary judgment motions on invalidity of additional claims will be submitted December 1, 2008, followed, if necessary, by further proceedings and a trial of remaining issues, which is presently scheduled for October 2009.

         SuperGuide Corporation.    On June 27, 2000, SuperGuide Corporation filed suit in the U.S. District Court for the Western District of North Carolina against DIRECTV Enterprises, LLC, DIRECTV, Inc., DIRECTV Operations, LLC, and The DIRECTV Group, Inc., Thomson Inc., and EchoStar Communications Corporation, EchoStar Satellite Corporation and EchoStar Technologies Corporation. The action alleges infringement of three U.S. patents and seeks unspecified damages and injunctive relief. Gemstar Development Corp. was added as a third party defendant because it asserted to have exclusive control of the patents by reason of a license agreement with SuperGuide Corporation. In August 2005, the Court granted summary judgment on two of the patents, dismissing the claims of

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DIRECTV HOLDINGS LLC

infringement relating to them with prejudice, leaving only one patent at issue which expired in 2005. After a bench trial, on July 19, 2007 the Court entered judgment denying Gemstar's assertion and holding that SuperGuide has the relevant rights relating to the remaining patent. Proceedings regarding the remaining patent were then initiated. In October 2008, DIRECTV and Thomson agreed with SuperGuide to settle the case, and we expect to be dismissed from the case in the fourth quarter of 2008.

         Early Cancellation Fees.    In 2008, a number of plaintiffs filed putative class action lawsuits in state and federal courts challenging the early cancellation fees DIRECTV assesses its customers when they do not fulfill their programming commitments. There are several lawsuits currently pending—some in California state court purporting to represent statewide classes, and some in federal courts purporting to represent nationwide classes. The lawsuits seek both monetary and injunctive relief. While the theories of liability vary, the lawsuits generally challenge these fees under state consumer protection laws as both unfair and inadequately disclosed to customers. Each of the lawsuits is at an early stage. Where possible, we are moving to compel these cases to arbitration in accordance with our Customer Agreement, but in states such as California where the enforceability of the arbitration provision is limited, we intend to defend against these allegations in court. We believe that our early cancellation fees are adequately disclosed, and represent reasonable estimates of the costs we incur when customers cancel service before fulfilling their programming commitments.

         Other.    We are subject to other legal proceedings and claims that arise in the ordinary course of our business. The amount of ultimate liability with respect to such actions is not expected to materially affect our financial position, results of operations or liquidity.

(b)    No previously reported legal proceedings were terminated during the third quarter ended September 30, 2008.

ITEM 1A.    RISK FACTORS

        The risk factors included in our Annual Report on Form 10-K for the year ended December 31, 2007 have not materially changed.

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DIRECTV HOLDINGS LLC

ITEM 6.    EXHIBITS

Exhibit Number	Exhibit Name
**31.1	Certification of the Chief Executive Officer of DIRECTV Holdings LLC pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 ("Section 302").
**31.2	Certification of the Chief Financial Officer of DIRECTV Holdings LLC pursuant to Section 302.
**31.3	Certification of the Chief Executive Officer of DIRECTV Financing Co., Inc. pursuant to Section 302.
**31.4	Certification of the Chief Financial Officer of DIRECTV Financing Co., Inc. pursuant to Section 302.
**32.1	Certification of the Chief Executive Officer of DIRECTV Holdings LLC pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 ("Section 906").
**32.2	Certification of the Chief Financial Officer of DIRECTV Holdings LLC pursuant to Section 906.
**32.3	Certification of the Chief Executive Officer of DIRECTV Financing Co., Inc. pursuant to Section 906.
**32.4	Certification of the Chief Financial Officer of DIRECTV Financing Co., Inc. pursuant to Section 906.

**

Filed herewith.

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DIRECTV HOLDINGS LLC

SIGNATURE

        Pursuant to the requirements of the Securities Exchange Act of 1934, each registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	DIRECTV HOLDINGS LLC (Registrant)
Date: November 6, 2008	By:	/s/ PATRICK T. DOYLE Patrick T. Doyle Executive Vice President and Chief Financial Officer
	DIRECTV FINANCING CO., INC. (Registrant)
Date: November 6, 2008	By:	/s/ PATRICK T. DOYLE Patrick T. Doyle Executive Vice President and Chief Financial Officer

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DIRECTV HOLDINGS LLC PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
DIRECTV HOLDINGS LLC CONSOLIDATED BALANCE SHEETS (Unaudited)
DIRECTV HOLDINGS LLC CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Condensed Consolidating Statement of Operations For the Three Months Ended September 30, 2008
Condensed Consolidating Statement of Operations For the Three Months Ended September 30, 2007
Condensed Consolidating Statement of Operations For the Nine Months Ended September 30, 2008
Condensed Consolidating Statement of Operations For the Nine Months Ended September 30, 2007
DIRECTV HOLDINGS LLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Concluded)

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ITEM 4T. CONTROLS AND PROCEDURES

PART II—OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS
ITEM 1A. RISK FACTORS
ITEM 6. EXHIBITS

SIGNATURE